You may think that you can save money in real estate by not using a Buyer's Agent. On the contrary, it is often argued that there is no savings because the secondary benefits of using a Buyer's Agent surpass any costs of such a Buyer's Agent. Nonetheless, the only factor that can actually save you money in brokerage commission in a real estate transaction is if it's a Direct Deal.
Buyer's Agent. Seller's Agent. Direct Deal. These terms may sound familiar, but do you really know what they mean? This knowledge is essential for all sides in real estate dealings, particularly understanding commissions and cost savings.
A Buyer's Agent refers to the issue of representation, not commissions, and there's a distinction between the triggers for earning a commission and providing representation within the real estate brokerage industry. In fact, commission and representation are independent variables in real estate brokerage. While it's true that a broker can both represent a party and earn a commission from such party's involvement in a given deal, a broker can also not represent a party and nonetheless earn a commission from such party's involvement in a deal.
When it comes to earning a commission, there are only two types of brokers in the State of New York: the Listing Agent and the Selling Agent (aka the Procuring Agent). What's the difference?
The Listing Agent receives commission based upon such agent obtaining authority from the seller/landlord to offer the property to the public, and such commission is earned when such property is sold/rented (Technically such commission is earned before the transaction's closing at the point when The Listing Agent procures [directly or through another broker] a buyer/tenant who joins the seller/landlord on a meeting of the minds on substantially all of the essential terms of a transaction, unless the trigger is modified by the parties in a brokerage agreement.); The Selling Agent receives commission based upon finding a buyer/tenant for the listed property and such commission is earned when such property is sold/rented (Technically, such commission is earned before the transaction's closing at the point when the Selling Agent procures a buyer/tenant who joins the seller/landlord on a meeting of the minds on substantially all of the essential terms of a transaction, unless the trigger is modified by the parties in a brokerage agreement.)
However, nothing about a broker serving as the Listing Agent or the Selling Agent indicates if such broker is representing the interests of the seller/landlord, the buyer/tenant, or both sides of the transaction. In fact, the Department of State explains, on its website, that "[t]he commission or compensation of a real estate broker is not regulated by statute or regulation." On the other hand, representation is regulated by statute and regulation (Real Property Law §443 and 19 NYCRR 175.7).
Specifically, the statute sets forth seven agency terms of art that detail the types of representation that are available by Real Estate Brokers in a real estate transaction. Representation is generally determined at the Real Estate Brokerage Firm level, not the individual Real Estate Salesperson level, as the Agency Disclosure Form states "a licensed real estate broker acting in the interest of," not a licensed Real Estate Salesperson acting in the interest of. Okay, the seven terms are:
(1) Seller's Agent; (2) Landlords' Agent; (3) Buyer's Agent; (4) Tenant's Agent; (5) Broker's Agent; (6) Dual Agent; and (7) Dual Agent with Designated Sales Agent. The first four of these are defined in plain English as follows:
Seller's Agent: 100% looking out for and negotiating on behalf of the seller's interests while directly reporting back to and being accountable to such seller.
Landlord's Agent: 100% looking out for and negotiating on behalf of the landlord's interests while directly reporting back to and being accountable to such landlord.
Buyer's Agent: 100% looking out for and negotiating on behalf of the buyer's interests while directly reporting back to and being accountable to such buyer.
Tenant's Agent: 100% looking out for and negotiating on behalf of the tenant's interests while directly reporting back to and being accountable to such tenant.
To understand the last three agency terms of art, three additional foundational terms of art are first required to be defined: (1) Direct Deal; (2) In-House Deal; and (3) Co-Brokered Deal. Again, in plain English:
Direct Deal: An individual Real Estate Salesperson is both the Listing Agent and the Selling Agent on the same transaction. Such agent is also possibly called a Licensed Associate Real Estate Broker as Real Estate Brokerage Firms are composed of agents that either hold a license as an Associate Real Estate Broker or Real Estate Salesperson.
In-House Deal: Two Real Estate Salespersons at the same Real Estate Brokerage firm are collaborating on a deal where one agent is serving as the Listing Agent and the other is serving as the Selling Agent on the same transaction.
Co-Brokered Deal: Two Real Estate Brokerage firms are collaborating on a deal where a firm (by and through a Real Estate Salesperson whose license is associated with such firm) is serving as the Listing Agent and the other firm (by and through a Real Estate Salesperson whose license is associated with such firm) is serving as the Selling Agent.
Now that these three foundational terms of art have been defined, the last three agency terms of art are defined as follows:
Broker's Agent: A Selling Agent on a co-brokered deal who indirectly negotiates on behalf of the seller/landlord, but reports back to and is accountable to The Listing Agent, not the seller/landlord. The reason that such agent cannot be a Seller's Agent/Landlord's Agent is because a regulation, 19 NYCRR 175.8, prevents the Selling Agent on a co-brokered deal from directly negotiating with the seller/landlord. As a result, the regulation prevents the Selling Agent from effectuating four of six of a Seller's Agent's/Landlord's Agent's requisite fiduciary duties, to wit: (1) Confidentiality; (2) Obedience; (3) Accountability; and (4) Full Disclosure. Each of those four fiduciary duties requires direct contact between agent and principal in order to effectuate.
Dual Agent: A Direct Deal where the seller/landlord and buyer/tenant both knowingly waive a conflict of interest permitting the Real Estate Salesperson to have compromised loyalties in neither negotiating on behalf of either party to the transaction.
Dual Agent with Designated Sales Agent: An In-House Deal where the seller/landlord and buyer/tenant both knowingly waive a conflict of interest permitting the Real Estate Brokerage Firm to have compromised loyalties and negotiate against itself, where an individual Real Estate Salesperson at such Real Estate Brokerage Firm will be selected by the seller/landlord and a different individual Real Estate Salesperson will be selected by the buyer/tenant to each serve, respectively, as the Listing Agent and the Selling Agent while negotiating 100% on behalf of the transacting party who selected such Real Estate Salesperson.
With knowledge of all these terms of art, what's lost on the average consumer is that most real estate listing agreements that provide for a discount do so based on the dispositive factor of whether there's a Direct Deal, because the same Real Estate Salesperson is then getting both sides of the commission and is therefore willing to give a discount. To illustrate, some listings call for a 6% commission to be split between the Listing Agent and the Selling Agent, but only call for a 4.5% commission if the Listing Agent is also the Selling Agent, under a Direct Deal.
So, buyers/tenants should not avoid Buyer's Agents/Tenant's Agents to avoid paying commissions. Instead, buyers/tenants who are seeking to save commission should seek out to deal directly with the Listing Agent on a Direct Deal. This benefits the buyer/tenant because when the seller/landlord is paying less commission to the Listing Agent, the seller/landlord can charge less money for the house while nonetheless netting the same sum in the deal.
Buyers/tenants seeking to save commission can either engage with a Real Estate Salesperson on a Direct Deal as an unrepresented buyer/tenant working with a Seller's Agent / Landlord's Agent or, alternatively, if both the seller/landlord and buyer/tenant waive the conflict of interest, the agent can act as a Dual Agent and represent all parties to the transaction in more of a mediator role with compromised fiduciary duties to both sides.
This article was written based on New York Law. This article is provided for informational purposes only. No advice or guarantees of accuracy are rendered herein.
Adapted from this Dan's Papers Article.