What is safety clause real estate?

A protection or safety clause in real estate is a provision in a purchase contract that aims to reduce risk for the buyer or seller if certain conditions are not met by closing.

The safety clause (also known as the protection or tail provision) is an important provision in an exclusive real estate listing agreement between a seller and broker. This clause allows the broker to continue receiving their commission even after the listing period expires if certain criteria are met.

On average exclusive listing agreements last for 3-6 months, during which the broker has the exclusive right to represent the seller’s property. But deals can take longer. The safety clause provides protection for the broker’s work and efforts even after the initial listing period ends.

The safety clause states that if the property is sold within a specified period after the listing expires (usually 30-180 days) to any buyer the broker dealt with during the listing period, the broker will still receive the agreed-upon commission. This prevents sellers from avoiding payment by waiting for the listing to expire before finalizing a deal.

Pros of the safety clause for brokers:

  • Ensures brokers get paid for their work if a deal closes just after listing expires
  • Discourages seller “waiting out” the listing agreement
  • Covers the broker for the leads and buyer relationships they developed

Cons for sellers:

  • Requires paying commission even after contract ends
  • Can delay listing with a new broker right after listing expires
  • Prohibits working independently with buyer prospects from listing period

Sellers should understand the implications before agreeing to a long protection period. But overall, the safety clause provides fair assurance to brokers for their upfront efforts and services.

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Real estate transactions involve significant financial investments and risk for buyers and sellers. To help reduce uncertainty, real estate purchase agreements contain contingency provisions that protect the interests of both parties.

These clauses provide agreed-upon conditions that must be met for the contract to be valid and enforceable.

Piece of paper, signifying a listing agreement in real estate.
Piece of paper, signifying a listing agreement in real estate.

What means to sign a listing agreement?

A listing agreement is a contract between a property seller and a real estate broker that legally authorizes the broker to represent the seller’s property on the market.

The listing agreement grants the brokerage certain exclusive rights to market the property for sale during a defined period, usually ranging from 3-6 months. In return, the brokerage provides services aimed at securing a buyer for the property.

Key components of a standard exclusive listing agreement include:

  • Description of the property being sold
  • Asking price and acceptable terms
  • Duration of the agreement
  • Broker duties, rights, and limitations
  • Commission amount and payout terms
  • Obligations of the seller
  • Provisions for early termination

Signing a listing agreement does not mean the property must sell within that timeframe. But it does bind the seller to the brokerage for the listing period. During this time, the brokerage will typically promote the property through the MLS, market exposures, showings to potential buyers, and negotiations.

The agreement provides the broker with legal authority to facilitate a sale on the seller’s behalf. It also ensures the broker earns a commission if a buyer is found during the listing period.

Listing agreements aim to align incentives between sellers looking to sell at the optimal price and brokers seeking their compensation for services rendered.

Read also: Consider selling to avoid broker commissions by selling privately after a listing agreement expires

Types of Real Estate Protection Clauses

A book on real estate law featuring a listing agreement.
A book on real estate law featuring a listing agreement.

Real estate protection clauses come in different forms to address various potential issues in a transaction. Common types of contingencies include:

Inspection Contingency

An inspection contingency allows the buyer to cancel the contract or request repairs from the seller if a professional home inspection reveals undisclosed problems or defects. This clause reduces risk for the buyer by letting them walk away if major issues are discovered.

An inspection contingency is crucial for buyers to cover the risk of expensive repairs on a property.

Financing Contingency

A financing contingency clause lets the buyer cancel the contract if they are unable to secure a mortgage loan under the agreed terms and conditions. This protects the buyer from being bound to a purchase they can no longer afford.

Sellers may be wary of financing contingencies if they doubt a buyer’s ability to get approved for a loan.

Appraisal Contingency

An appraisal contingency allows the buyer to walk away if the home appraises for less than the offered purchase price. This protects against overpaying for a property that banks deem less valuable.

Appraisal gaps are common in hot housing markets with bidding wars. This clause offers the buyer an “out.”

Home Sale Contingency

A home sale contingency lets the buyer back out of the deal if they are unable to sell their current residence within a defined period. This gives them flexibility when needing to coordinate the sale and purchase.

Sellers may be reluctant to accept offers with a home sale contingency since it brings uncertainty.

Kick-Out Clause

A kick-out clause benefits the seller by allowing them to continue marketing the home and accept another purchase offer – even if already under contract. This creates incentives for buyers to submit their strongest offer.

A kick-out clause is not the same as a safety clause in a real estate contract.

The main differences are:

  • Safety clause protects the buyer, kick out clause favors the seller.
  • Safety clause relates to buyer financing, kick out allows seller to weigh other offers.
  • Safety clause returns buyer deposit if financing fails, kick out returns deposit if seller finds another buyer.

While both involve conditional refunds of the deposit, the safety clause gives the buyer an “out” if their mortgage falls through, whereas the kick out clause allows the seller to change their mind and go with a different buyer. They protect different parties in the transaction.

Kick-out clauses encourage potential buyers to put their best foot forward with attractive terms to beat competing offers.

Escalation Clause

A man and woman holding a listing agreement or real estate protection clause.
A man and woman holding a listing agreement or real estate protection clause.

An escalation clause states that the buyer will automatically increase their offer if a higher bid comes in, up to a defined maximum amount. This helps sellers get top dollar in competitive markets.

Escalation clauses motivate buyers to bid aggressively, knowing they’ll beat lower offers.

When does protection clause may not apply?

Contingency clauses can provide important protections in real estate deals. But they must be properly exercised and applicable to the specific circumstances in order to have effect.

There are a few scenarios where a protection clause in a real estate contract may not apply or be enforceable:

  • If the buyer or seller does not properly exercise the contingency clause according to its specific terms, requirements, and timeframe. The procedures outlined must be strictly followed.
  • If the buyer or seller is deemed to be acting in bad faith by using the contingency as an excuse to back out of the deal without a legitimate reason. Contingencies should not be exploited.
  • If the purchase agreement did not originally contain the protection clause in question. Clauses must be present initially in order to be exercised.
  • If the clause contains ambiguous or contradictory language that renders it unenforceable. Poorly written clauses may have no legal effect.
  • If the clause violates local real estate laws and regulations. Certain jurisdictions prohibit or restrict specific contingency clauses.
  • If the situation the clause was meant to protect against is resolved prior to closing. For example, if repairs requested after inspection are completed to the buyer’s satisfaction.
  • If both parties willingly waive their rights to the protection clause by mutual agreement, either from the outset or during the transaction.
  • If the home sells to a party completely unrelated to the original purchase agreement containing the protection clause. Clauses usually only apply for a specific buyer.

Purpose of Real Estate Protection Clauses

Beyond covering specific risks, real estate protection clauses serve important general purposes:

  • Allocate risk between the buyer and seller so each party is protected where they need it most.
  • Provide an “out” if certain defined conditions are not met by the closing date. This prevents being forced into a problematic purchase or sale.
  • Help move negotiations forward in situations of uncertainty by giving parties peace of mind.
  • Give buyers more confidence to make an offer on a home without taking on excessive risk.

Legally Binding Clauses in Listing Agreement

Most states require that a real estate listing agreement contain legally binding clauses, provisions and disclosures, including:

  • Exclusive right to sell clause grants the brokerage exclusive rights to market and sell the property during the listing period in exchange for maximum exposure.
  • Commission terms – The agreement must specify the total commission percentage and how it will be split between listing and buyer’s agents.
  • Duration of listing – A defined listing period, typically ranging from 3-6 months.
  • Brokerage duties and obligations – Spells out marketing activities the brokerage will undertake.
  • Termination provisions – Under what conditions the agreement can be terminated early by either party.
  • Safety/protection clause – Allows the broker to still receive commission if the home sells to a procured buyer shortly after listing expiration.
  • Seller disclosures – Any known defects must be disclosed.
  • Signatures – Agreement must be signed by authorized representatives of both brokerage and seller.

Having these key items spelled out clearly in the listing agreement is crucial to protect the interests of the brokerage and seller while ensuring ethical and transparent representation.

What happens when listing agreement expires?

Once a listing agreement expires, the contractual relationship between the seller and the listing agent ends. The property will be removed from the MLS and real estate sites.

  • The seller then has a few options:
  1. Sign a new listing agreement with the same agent
  2. Find a new real estate agent to list the property
  3. Try to sell the property independently
  • In some cases, listing agreements contain a “protection period” clause that allows the listing agent or broker to still collect a commission for some period after the listing expires. If they had shown the property to buyers who end up purchasing it within a specific time period after expiration (typically 30-90 days) they will collect their commision.
  • After expiration, the seller is free to list with a new agent. However, some listing agreements contain a “non-compete” clause barring the seller from relisting with another brokerage for a period of time.

MLS updates, commission checks, documentation, and direct communication all typically provide listing agents confirmation that one of their listings has sold or is pending sale. They’d be actively involved throughout the sale process.

There are a few main ways a listing agent would know if a property they listed has sold or not:

  • Status updates in the MLS – Most properties are listed on the local Multiple Listing Service (MLS). This system updates the status of listings, so agents can see when a property changes from “Active” to “Pending” or “Sold.” The listing agent would get alerts about status changes.
  • Direct communication with the selling agent – The selling agent who brings an offer and negotiates the sale would be in touch with the listing agent to communicate terms, negotiate the offer, and coordinate closing. This ongoing contact keeps the listing agent in the loop.
  • Closing documentation – The listing agent is typically required to sign closing paperwork and would be notified of the closing date/time. They’d have documentation the sale went through.
  • Commission payment – The listing agent would receive their commission check after the sale closes as compensation for bringing the buyer and seller together. This would confirm the property sold.
  • Updates from the seller – The home seller would likely communicate updates to the listing agent, informing them when an offer has been accepted and the close date.

 

  • While the listing agent no longer has an active agreement, they still have duties such as retaining records and providing info to the seller.
  • Listing expiration is common when: the home is overpriced, there are few showings/offers, or the market conditions change. Communication between the agent and seller is key.
  • The agent will likely advise on pricing and strategy changes to avoid another expiration. Ultimately, it’s the seller’s choice to relist or try another agent.

What is "exclusive right to sell" clause in real estate?

Exclusive right to sell guarantees the listing brokerage the commission if the home sells during the listing period, providing maximum exposure but less flexibility than other agreement types. Here are the key points on exclusive right to sell in real estate listings:

– An exclusive right to sell listing is a contractual agreement between the seller and the listing broker/agent, where the brokerage is granted the exclusive right to market and sell the property during the original listing term.

– This type of listing contract means the seller cannot hire any other brokers or agents to sell the home while the agreement is active. The exclusive brokerage is the only one entitled to a commission if the home sells during that time.

– If the seller finds a buyer directly on their own, they would still owe the listing broker the commission per the exclusive agreement. The exceptions are any individuals the seller specifically exempts in writing.

– Exclusive right to sell listings provide maximum exposure as the brokerage markets aggressively knowing they will get paid. This can lead to higher sales price and faster sale.

– However, if the seller is unhappy with the broker’s marketing or efforts, they cannot easily switch agents until the listing expires. Open listings provide more flexibility. 

– Non-exclusive “exclusive agency” listings allow the seller to find a buyer directly while still listing with an agent. The agent only gets paid if they procure the buyer.

– Exclusive right to sell agreements typically range from 3-6 months. If the home doesn’t sell, the listing can be renewed or switched to a new brokerage after expiration date.

What is safety clause in real estate?

A safety clause in a listing contract, known also as a broker protection clause, provides commission protection to the listing broker for buyers they introduced should a sale occur shortly after expiration. This covers the broker’s efforts while preventing the avoidance of commission. Here are the key points on safety clauses in real estate:

– A safety clause, also known as a safety protection clause or extender clause, is a provision in a listing agreement that allows the listing broker to still receive their commission fees if the property sells to a buyer they procured within a specified period after the listing expires.

– The typical safety clause period of most real estate contracts ranges from 30-180 days past the listing expiration. This protects the broker’s efforts even if a deal closes shortly after the listing ends.

– Without a safety clause, sellers could wait for the listing to expire before selling to an interested buyer found by the broker, avoiding paying commission. The clause prevents this.

– The safety clause only applies to buyers who were introduced to the property during the listing period. If the seller independently finds a new buyer after expiration, the clause would not apply.

– Some safety clauses require the broker to provide a protected buyer list within a certain timeframe after expiration, detailing buyers still covered.

– Brokers favor safety clauses to ensure they get paid for procuring ready, willing, and able buyers. Sellers should understand the clause before signing.

– Exemptions to safety clauses include FSBO sales, sales to family members, or other individuals exempted in writing.

Using Protection Clauses: Tips and Considerations

If you’re involved in a real estate transaction, keep these tips in mind with regards to protection clauses:

Consult professionals. Work with experienced real estate agents and attorneys to ensure you fully understand any clauses and their implications before signing.

Follow proper procedures. Exercising a contingency requires abiding by its terms. Act in good faith instead of exploiting clauses.

Assess risks. Consider which issues are deal-breakers for you that warrant protections via contingencies.

Avoid overusing clauses. Too many contingencies can stall or derail deals. Use only what you truly need.

Don’t refuse negotiations. Be willing to discuss modifications to clauses that address the concerns of both parties.

Conclusion

Real estate protection clauses enable buyers and sellers to transact with greater confidence by allocating risk and providing legal “outs” if issues arise.

While contingencies can complicate transactions, proper use protects everyone’s interests so deals can move forward. Work closely with real estate professionals to determine the right clauses for your specific situation.

Q: What is a protection clause in real estate?

A: A protection clause is a provision in a real estate purchase contract that aims to reduce risk for the buyer or seller should certain conditions not be met by closing. 

Common examples include inspection, financing, appraisal, and home sale contingencies.

Q: What does an inspection contingency clause mean?

A: An inspection contingency allows the buyer to cancel the contract or request repairs if a professional inspection reveals undisclosed problems with the home. 

This protects the buyer from inheriting expensive repairs.

Q: How does a financing contingency work?

A: A financing contingency lets the buyer walk away if they’re unable to secure a mortgage under the terms outlined in the purchase agreement. 

This protects the buyer if lending conditions change.

Q: What is the purpose of an appraisal contingency?

A: An appraisal contingency protects the buyer if the home appraises for less than the offered purchase price. 

It lets them renegotiate or walk away to avoid overpaying.

Q: When would a home sale contingency apply?

A: A home sale contingency allows the buyer to back out of the deal if they aren’t able to sell their current home within the timeframe defined in the clause. This gives them flexibility.

Q: What is a kick-out clause in real estate?

A: A kick-out clause benefits the seller by allowing them to continue marketing the home and accept another buyer’s offer, even when already under contract. It creates incentives for strong initial offers.

Q: How does an escalation clause work?

A: An escalation clause states the buyer will automatically increase their offer if a higher bid comes in, up to a set maximum amount. 

This helps sellers get top dollar in competitive markets.

Q: Why are protection clauses important?

A: Protection clauses allocate risk between buyers and sellers, provide legal “outs” if issues arise, and give parties confidence to move forward even when there’s uncertainty.

Q: What should I know before agreeing to a protection clause?

Q: What is a protection clause in real estate?

A: Consult real estate professionals to fully understand any clause’s implications. Follow proper procedures, act in good faith, and only use clauses that are truly needed.

Q: How can clauses complicate a deal?

A: Too many contingencies can stall or derail deals. Refusing to negotiate clauses may also endanger transactions. 

Use clauses strategically to protect interests without jeopardizing closings.

Q: A listing agreement allows a broker to:

A: the listing agreement defines the broker’s broad authorities to market, price, show, offer guidance on, and sell the property on the seller’s behalf in exchange for commission compensation.

Here are some of the key functions a listing agreement allows a real estate broker to perform:

  • Market the Property – Advertise and promote the seller’s property through means like MLS listings, online postings, print ads, yard signs, open houses, etc.
  • Represent the Seller – Act as an agent on the seller’s behalf for negotiating sales terms, drafting contracts, advising pricing, facilitating showings, screening buyers, etc.
  • Collect Commissions – Earn and receive commissions per the agreed terms when the property sells as compensation for services.
  • Have Exclusive Listing Rights – Operate as the sole real estate agent entitled to a commission for selling the property.
  • Define Commission Splits – Dictate the fee splits with any outside brokers who bring buyers.
  • Set Listing Timeframe – Outline how long the agreement and broker authority is valid for, such as 3-6 months typically.
  • Withdraw the Listing – Take the property off the market if desired before the term expires if it is an exclusive listing.
  • Alter the Price – Adjust the listing price of the property in consultation with the seller.
  • Reject Offers – Advise the seller whether to accept or reject any purchase offers received.
  • Extend the Listing – Renegotiate extensions to the listing agreement as the expiration nears.
  • Cancel the Listing – Terminate the agreement early if seller requests or major issues arise.