In a traditional real estate transaction, one agent represents the buyer and another agent represents the seller. It’s understood that each agent represents the best interests of their individual client. When the deal closes, the seller pays a commission, typically 6%, which is typically evenly split between both agents. However, there is an alternative arrangement — called dual agency — that sometimes arises and can cause complications.
What Is Dual Agency?
In particularly competitive markets like NYC, the buyer and seller in a real estate transaction sometimes end up being represented by the same agent. This arrangement is called dual agency, because one agent is representing both clients. Dual agency can have ethical and financial implications for the buyer, seller, and agent.
When Would Someone Enter Into Dual Agency?
Usually, dual-agency real estate transactions occur when a buyer enters a deal without representation from an agent. Some experienced buyers actively choose to forgo a buyer’s agent, but often buyers enter dual agency passively.
It’s also worth noting that dual agency can occur if the buyer’s agent and the listing agent work for the same brokerage.
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How Dual Agency Impacts an Agent’s Loyalty
To understand the implications of a dual-agency real estate transaction, consider the arrangement when a seller initially hires an agent. At this point, their relationship is defined by undivided loyalty. This is not just agreed upon with a handshake — it’s required by law. The New York real estate disclosure form outlines a listing agent’s fiduciary duties to the seller as “reasonable care, undivided loyalty, confidentiality [and] full disclosure.”
When a buyer comes along without representation and the listing agent suddenly has to serve both parties, they can no longer act with undivided loyalty and confidentiality. Instead, they serve as a middleman between the buyer and seller, facilitating the transaction and serving both parties equally.
That’s why, after entering dual agency, it’s very important that both parties be careful about what they say to the agent. According to the New York Department of State: “Although your agent still cannot breach any confidences, your agent may not use the information you give him or her in a way that advances your interests.”
“A buyer and a seller must understand what they are giving up,” says Al Fazio, a real estate attorney who serves as the general counsel for the Brooklyn Board of Realtors. What they’re giving up is an agent from whom they can expect completely total loyalty. When dealing with a dual agent, you must regard them as a neutral third party, not as a confidant or advocate on your behalf.
Neither a buyer nor a seller should ever find themselves in a dual-agency real estate situation without giving prior consent. New York state law requires the listing agent to get both the buyer and seller’s full written agreement via a disclosure form.
What a Dual Agent Can’t Legally Do
But consenting is not enough. To ensure that all parties fully understand the implications of dual agency, Fazio stresses the importance of signing the Advanced Informed Consent to Dual Agency form. In addition to defining the role of a dual agent, this optional form enumerates exactly what a dual agent can and cannot do.
Most importantly, the form clarifies that a dual agent cannot:
- Recommend a price the buyer should put in as an offer.
- Recommend a price the seller should accept or with which he/she should counter.
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How Dual Agency Changes the Commission Structure
In addition to changing an agent’s loyalty, dual agency also changes an agent’s commission. Now, instead of splitting a 6% commission with a buyer’s agent, the dual agent will get the entire commission. As such, listing agents stand to gain quite a lot in these types of deals. Sellers must recognize this and be sure their agent is committed to getting them the best possible deal — not the one that yields them the highest commission.
Before signing a contract, sellers should have a candid conversation with their agent about what will happen to the commission structure should dual agency occur. For example, if they end up in dual agency, a seller might want to negotiate the agent’s commission down to 4% or 5%.
Market conditions can have an impact on dual agency and commission structure as well. In a robust market, where properties are likely to sell at or above ask, sellers may have an easier time negotiating a reduced commission. In a weak market, however, a buyer might have an easier time putting in a low offer, knowing that that the agent won’t have to split their commission and the seller may have negotiated a reduced commission, too.
Whatever the commission structure, sellers and their agents should agree and formalize the terms in the contract before putting the property on the market.
Why Do Buyers and Sellers Enter Into Dual Agency?
Dual-agency real estate arrangements arise for several reasons. Here are some possible scenarios:
- Buyers may forgo working with a buyer’s broker because they are confident in their ability to handle the home search and transaction process without individual representation.
- Buyers may forgo working with a buyer’s agent in particularly competitive markets wherein sellers have the upper hand. Some sellers will look more favorably on buyers without representation, because they see it as an opportunity to negotiate a lower commission with their agent.
- Buyers may enter dual agency by default. This can occur when they attend an open house without representation from a buyer’s agent or without the intention of putting in an offer. If, at the open house, they decide to put in an offer on the spot, the deal will then be a dual-agency transaction. First-time buyers who plan to attend open houses without representation should be wary of this situation and have a contingency plan, should they decide to put in an offer immediately.
- Buyers can enter dual agency when their agent is also the listing agent for the property they ultimately buy. If buyers find themselves in this situation, they should be sure their agent is being transparent with them and showing them the listings that best match their needs and budget, not just the listings they are representing.
- Sellers may enter dual agency because they are highly motivated to close. If their property has been on the market for a long time, or the sellers need to cash out to finance their next purchase, they may be willing to forgo having their listing agent’s full fiduciary duties. This may seem like a raw deal, but according to Melissa Bemis, an agent with Douglas Elliman, often “sellers are more focused on getting the closing price they want than the details of dual agency.”
- Buyers may enter dual agency when their buyer’s agent works at the same brokerage as the listing agent representing the property they are purchasing. In New York City, where a few large brokerages dominate the market, this occurs quite frequently.
Deciding What’s Best for You
Legally, there is absolutely nothing wrong with dual agency as long as both parties agree to it, Fazio says. “But is it the best way for both parties to be represented? The law does not say. That is up to the buyer and seller to determine themselves.”