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The Holdover Clause: What and Why

Posted February 27th, 2012 under pitfalls, say what?, smart buying, smart selling.

Whenever my clients are signing a Listing Agreement, I make sure I explain the purpose of the Holdover Clause.

This is a clause that kicks in on the day your Listing Agreement expires, and typically lasts for 90 or 120 days.

Here's how it works: let's say John is selling his home. He signs a Listing Agreement with a Realtor, including a 90-day holdover clause.

During the time that John's home is on the market, his Realtor introduces him to a potential buyer. (Let's call the buyer Claudia.)

Claudia doesn't buy John's home during the listing period, and the listing expires without the home selling.

However, a few days after the listing has expired, Claudia approaches John with an offer to make a private sale. John agrees, and sells his home to Claudia.

In this case, John's Realtor is entitled to make a claim for the commission John would have owed him. The purpose is to compensate John's Realtor for the work the Realtor did in introducing John and Claudia. (After all, this is one of the main reasons a seller hires a Realtor in the first place.)

There's also a slightly different scenario where the clause also applies, this time with regard to competing Realtors.

This time, let's say John's Realtor introduces him to a different buyer—call him Michael. Michael is interested but ends up getting cold feet and doesn't make an offer. John's home fails to sell before the listing expires. John signs a new listing agreement with a Realtor from a different brokerage, this one offering a lower commission rate.

Meanwhile, Michael gets over his cold feet and decides to make an offer. John eventually sells his home to Michael.

In this case, John's first Realtor is entitled to make a claim for the difference in the commission rate between the two brokerages. The purpose here is to protect John's Realtor from having John “poached” by a cut-rate brokerage.

For Buyers

The standard Buyer Representation Agreement includes a similar clause, with the main difference being that a buyer that switches to a new Realtor during the holdover clause must pay the full commission to both Realtors.

My Advice

Keep in mind that the Holdover Clause is not a law! It's part of a negotiable agreement that you sign voluntarily.

If you feel the Holdover Clause ties your hands, you have two options. First, you could try to negotiate it out of your agreement, though don't expect many Realtors to go along with this.

Your second option is to use a flat fee listing service instead of one based on a percentage commission. In this case, because the Realtor's fees are guaranteed, they have no reason to include a holdover clause.

Finally, there is nothing wrong or illegal about waiting for your holdover clause to expire, then doing a deal with your buyer. However, with no guarantee that the buyer will follow through, and no compensation if they don't, this is not an option I would recommend.

Want to know more about a clause in your agreement? Just ask me, I'll be happy to help.