A net listing is an agreement between the seller of a home and the broker entrusted by the seller to find a buyer. In most listing agreements, the broker is entitled to a percentage of the selling price as his commission. Conversely, in a net listing agreement, the broker takes as his commission the difference between the sale price and the net price agreed upon by the seller, as long as the sale price is higher. Since this practice can put the broker in a position to exploit the seller, it is considered illegal in many locations.
The process of selling a home can be a difficult one for those who are inexperienced in the real estate market. As a result, home sellers often seek out a licensed real estate broker to facilitate home sales. Brokers have experience showing homes to potential buyers, dealing with all of the regulations associated with home sales, and negotiating fair prices. When a home seller hires a broker, one of a variety of conventional listing agreements between the two parties is usually signed, stipulating the fees that are due to the broker. One type of unorthodox listing agreement is a net listing, and sellers should beware of this arrangement.
As an example of how a net listing works, imagine that a seller wants his house to be sold for no less that $100,000 US Dollars (USD). That is considered the net price, and the broker in turn agrees to sell the house and take as commission anything in excess of the net that is accomplished by the eventual sale price. If the house is sold for $125,000 USD, the broker would receive as his or her commission $25,000 USD, which is the difference between the sale price and the net price.
Such a net listing agreement can lead to all sorts of ethical dilemmas for brokers, which is why many states in the United States do not allow the practice. Some brokers might purposely misrepresent the value of a house to sellers to encourage them to set a low net price. If the home sells at far greater than that amount, the broker will pocket a hefty amount of money that rightfully should have belonged to the sellers.
In addition, a broker in a net listing agreement might encourage buyers to hold out for higher sale prices in an effort to nab a higher commission. Legitimate offers on the house might be turned down by such a dishonest broker, especially if those offers were too close to the net price and thereby not that profitable to the broker. Sellers should be wary of selling their home in this manner even if the practice is legal where they live.