NYS Agency Disclosure Law- Your Rights As a Home Buying Consumer

A study by the Federal Trade Commission (FTC) in 1983 found that over 72% of home buyers thought that the agent showing them homes represented their interests, when in fact they represented only the interests of home sellers.  

This study was prompted by complaints, mainly by home buyers, that information they gave ‘their agent’- unbeknownst to home buyers- was being passed on to home sellers.  This information was being used to the seller’s advantage to help negotiate maximum selling prices at the best possible terms.  The agents were following their legal duty of ‘full disclosure’ as ’subagents’ to sellers.   This included disclosure of sensitive information by real estate agents to home sellers of properties listed by companies other than the listing company.  Up until the Agency Disclosure Laws, few home buyers were ever aware of this.

The result of this FTC study was for each state to enact their own version of a Real Estate Agency Disclosure Law, which would explain to buyers and sellers the types of real estate agents available, their respective duties, and who represented whom in a real estate transaction.

New York State’s first Agency Disclosure appeared in 1992, with some notable revisions and changes made, leading to the most recent version.  It is interesting to note that Dual Agency at that time was considered a ‘legal and ethical gray area that State and Realtor officials recommend avoiding.’  Today, Dual Agency is a normal and accepted practice offered by most real estate companies (see previous posts on the pitfalls and dangers of Dual Agency to home buyers).   Dual agency mainly benefits the interests of the real estate company, by allowing it to keep an entire commission (double the money), while providing half the work and representation to the buyer and seller.

The current version of Agency Disclosure explains Seller’s Agent, Buyer’s Agent, Dual Agent, Dual Agency with Designated Sales Associates, and Broker’s Agent.  It is required by law that this form be provided to any consumer at ‘the first substantive contact’, before viewing any property, and before providing the agent with any personal or financial information about themselves.   The consumer is asked to sign the disclosure form and should be given a copy. 

The consumer always has the right to choose the type of agent they want to work with.   A buyer need not consent to Dual Agency with a simultaneous and notable reduction of the agent’s duty of undivided loyalty.  You can be referred to a different real estate broker (agency) to represent you on that transaction.

Please visit our website to read the current NYS Agency Disclosure, and also view a copy of a notice written by the NYS Department of State Counsel’s Office entitled ‘Be Wary of Dual Agency.’

Mortgage Pre-Qualification/Mortgage Pre-Approval- What’s the Difference?

One of the very first steps a home buyer should take, before choosing a real estate agent (preferably an exclusive buyer’s agent from an exclusive buyer’s agency) and prior to the home search, is getting mortgage pre-qualified or pre-approved.  This will give you an idea of the amount of financing a lender will provide based on your credit, income, and other requirements.  However, these terms are often used interchangeably.  What’s the difference?

A mortgage pre-qualification is the quickest and easiest way of getting a general idea of how much a lender may offer to lend you.   The lender will usually run a credit report, and then issue a written certificate based on verbal [undocumented] information, including your income and employment status.  A pre-qualification is usually provided at no cost to the potential borrower.   Pre-qualification letters are less meaningful than a pre-approval.   Many listing agents will require a mortgage pre-approval with an offer to purchase, but will frown upon receiving a mortgage pre-qualification.

Note:  A pre-qualification or pre-approval are not a guarantee or commitment to provide financing.  Only a formal unconditional loan commitment may be considered a firm approval to provide financing.

A mortgage pre-approval requires written documentation and verification of income, assets, credit, and employment.  A pre-approval requires completing a formal loan application, and an application fee is typically charged.  A pre-approval is much more reliable as a written indication of how much financing a lender may provide.  A Good Faith Estimate should be received by the borrower within 3 days of the loan application, which will give a borrower an idea of estimated closing costs, based on an estimated sales price and property taxes.

Ask the mortgage officer how much the monthly PITI payment will be based on the loan amount requested.  PITI is mortgage principal and interest, taxes, and homeowner’s insurance.  Is this figure within your budget, or is it more than what you can comfortably afford?  If it is too high, consider a lower price range, a more affordable area, or a different type of housing (ex.:  condo or co-op). 

How Are Exclusive Buyer’s Agents Compensated?

Many people believe that the seller pays the commission in a residential real estate transaction.   Well, the fact is, while real estate commissions are normally disbursed by the seller’s attorney at the closing, the buyer is providing the funds for the brokerage fees as part of the purchase price, which is the source from which the commission check(s) is/are paid. 

Real estate commissions are built into the asking and final selling price of residential property listed through the Multiple Listing Service (MLS).  The buyer is paying these fees, which are included as part of the actual total purchase price.  If the buyer is buying a home through an ordinary seller’s agent, that buyer is not receiving agency representation or protection, but is still providing the funds for the commission to the listing and selling agents.  The listing and selling agents represent the interests of the home seller with legal duties to negotiate for the highest possible price at the best terms for the seller.  

When a buyer purchases a home through an exclusive buyer’s agent (EBA), most, if not all, of the compensation to the EBA is already covered, through MLS cooperation with the listing agency, so it usually costs the buyer no more to use an EBA than buying a home through any seller’s agency.  However, the buyer gets much more from EBA representation, including loyalty, protection, evaluation, verification, negotiation, and advocacy- duties and services that no seller’s agency acting as a ‘buyer’s agent’ can provide or guarantee.  This translates into savings in time, money, and effort.  These savings quite often can be very substantial. 

Exclusive buyer’s agents are Realtor members with the same access to visit any MLS listed property, just like any Realtor, and are typically compensated the same way as any Realtor- through the proceeds of the transaction.   EBA’s help to level the playing field for home buyers in what was, for many years, strongly tilted to benefit home sellers only.  The fairly recent move by the National Association of Realtors and various state Realtor associations towards sanctioning dual agency as an acceptable practice mainly benefits the financial interests of the real estate company.

Before calling the listing agent/company of a property you are interested in viewing, consult an exclusive buyer’s agent.  It will be one of the smartest decisions you make towards the purchase of your next home! 

Key Definitions (Part 4): Exclusive Seller’s Agency/Exclusive Buyer’s Agency

For the past 90 years or so, all real estate agents were Exclusive Seller’s Agents.  When a real estate agent lists a home for sale, that listing agreement is actually a contract.  An agent from the listing company, as well as any agent from any company other than the listing company, by law represents the interests of the seller, in a client-level relationship (subagency).   This includes legal duties to negotiate for the highest possible price at the best possible terms for the seller, and to disclose everything they know about any buyer that would increase the seller’s final selling price, and improve the terms of sale. 

Example:  If a buyer customer tells an ordinary seller’s agent to make an opening offer of $340,000, but mentions he/she is also willing to pay the full asking price of $400,000 for the home if necessary, that agent is required by law to pass this information on to the seller (fiduciary duty of full disclosure).  This is traditional real estate [seller's] agency, and the way the real estate business has been for many, many years. 

Seller’s agency is good for sellers, but not very good for home buyers…

…which is why Exclusive Buyer’s Agencies and Buyer Agency Representation have grown tremendously in popularity in the U.S. over the past several years.

BEWARE:  Most real estate agents claiming to be ‘buyer’s agents’ are not true [exclusive] buyer’s agents!  This practice exposes the buyer to non-representation or dual agency on a property listed with that agent’s company, and only serves to benefit the financial interests of the listing company.  They are non-exclusive buyer’s agents, although they may require you to sign an ‘exclusive right to represent agreement’, which only benefits the agency, not the buyer.

If an agent claims to be an exclusive buyer’s agent, and that agent lists property for sale, or works for a company which lists property for sale, that person/agency is not an exclusive buyer’s agent.  This is an unethical and fraudulent use of  ‘exclusive buyer’s agent’ as an agency and agent choice.

Exclusive buyer’s agents work for companies called Exclusive Buyer’s Agencies.  Exclusive Buyer’s Agencies and their agents never list property for sale.  Sellers are considered customers, not clients (Refer to Definitions, Part 1 to explain these key terms).   

Not listing homes for sale is the only way to ensure, by law, that home buyers are fully represented 100% of the time by the company with undivided loyalty on any property, without the pitfalls of dual agency or non-representation to the buyer.   This practice enables the exclusive buyer’s agent and his company to concentrate on finding the best home for the buyer client.   No ordinary seller’s agent saying they can act as a ‘buyer’s agent’ can make this claim or guarantee undivided loyalty 100% of the time.

Exclusive buyer’s agents verify listing information for accuracy, provide fair market value reports, advise buyers on how to negotiate most favorable price and terms, protect and maintain buyer confidentiality of sensitive financial and personal information, disclose what is right and wrong with any property of interest, and much more.  Exclusive buyer’s agents are typically Realtors with the same access as any Realtor to visit any property listed with any  seller’s listing company. 

Key Definitions (Part 3): What is Dual Agency With Designated Sales Associates?

Part 2 discusses Dual Agency, which explains how an agent can ‘represent’ the interests of both the buyer and seller in the same transaction on a property listed with that agent’s company.  The conflict of interest inherent in this type of agency relationship was discussed in Part 2. 

Dual Agency with designated sales associates is a more recent twist on dual agency.  The principal broker can assign two sales associates, one representing the buyer as a ‘buyer’s agent’, and the other representing the seller as a ’seller’s agent’.   This assumes that both the buyer and seller have been properly informed of the drawbacks and pitfalls of dual agency, that they each give their consent to this form of  ‘agency’, and allow the dual agent the ability to create a conflict of interest. 

The principal broker and each designated sales associate are still dual agents, meaning that they cannot provide undivided (full) loyalty to their respective ’client’, and cannot provide full disclosure or advocate for their best interests.  The buyer and seller are on their own to decide how to negotiate price and terms, and to decide what is right and wrong about the property being offered, and the transaction itself.  Each designated sales associate merely acts as a facilitator to bring the transaction to a closing.  

The degree of advocacy each designated sales associate can offer is to provide moral support, act friendly, serve milk and cookies, and recommend the best restaurant in town. 

The designated sales associate for the buyer cannot help the buyer negotiate for the lowest possible price and best terms, and can’t disclose any known physical deficiencies, or functional and locational defects or deficiencies.  That’s left up to the buyer- or the buyer’s home inspector, or their uncle (and self-proclaimed real estate expert)- to uncover.  By law the agent must disclose any known physical defects (but not deficiencies) to the buyer.     

The designated sales associate for the seller cannot help the seller negotiate for the highest possible price and best terms, and cannot disclose any information about the buyer that would give the seller an advantage over the buyer.  

Of real concern is maintaining confidentiality of sensitive information between the two agents.  While the agents cannot disclose certain information to their respective ‘clients’, each agent must maintain the confidentiality of sensitive information about their respective client.  Information found in office files, computers, fax machines, office meetings, or just talking by the water cooler can be shared and used to the disadvantage, or advantage, of one client over the other in the transaction. 

Why is this form of dual agency now offered?  Simple.  Follow the money trail.  With many traditional seller’s agents claiming they can also be ‘buyer’s agents’, this is a very profitable business model.   A company which sells it’s own listed property ‘in-house’, while claiming it can represent the interests of both the buyer and seller at the same time in the same transaction, collects both sides of the commission- double the money. 

Dual agency and dual agency with designated sales associates permits a conflict of interest to occur, while contradicting the very meaning and essence of agency:  placing the goals and interests of the client above those of the agent and anyone else in the transaction at all times by law.

Dual agency is good for the real estate company, but not so good for home buyers.   Dual agency places the goals and interests of the real estate company above those of the buyer and seller, by allowing a conflict of interest to occur.  Dual agency contradicts the very meaning and essence of true agency.