Beginning this month, real estate agents in New York State will need to make greater efforts to put consumers on notice when they are working on both sides of a deal.
Prospective home buyers will be asked to sign a new agency disclosure form after their first substantial contact with an agent, a step designed to clarify the relationship between agents, sellers, buyers and renters.
The new form replaces a document that’s caused more confusion than solved problems since it was introduced in 1992. The old document combined language for sellers and buyers along with landlords and tenants, but often didn’t fully clarify so-called dual agent relationships, situations in which the broker represents both the buyer and the seller.
The old regulations said dual agents could not guarantee undivided loyalty to buyers, since both broker and seller have a financial incentive to get the highest price for a particular house as possible. Other language in the old form was meant to clearly indicate that sellers generally enlist brokers to sell their homes and that buyers are entitled to “engage a real estate agent as a buyer’s or tenant’s agent.”
The new document may make some of these occasionally confusing relationships — and their commercial implications — a bit more obvious.
The biggest change on the new New York State Disclosure Form for Buyer and Seller is the inclusion of a definition of the term “dual agency with designated sales associates,” a situation that is more likely to occur at larger firms.
In those situations, one sales associate at a brokerage is representing the seller and another sales associate at the same firm is representing the buyer, which means the firm is working both sides of the deal and needs to disclose the fact.
The new document states that “the principals or the real estate broker who represents both parties as a dual agent may designate a sales associate to represent the buyer and another sales associate to represent the seller.”
Designated sales associates “must explain that like the dual agent under whose supervision they function, they cannot provide undivided loyalty.”
And, for the first time, the form includes a checkbox where a potential buyer or seller can indicate consent for dual agency with designated sales associates.
“The change formalizes what has been informally going on for years,” said Michael Brockbank, deputy counsel at the New York State Department of State, which issues real estate licenses and oversaw the form’s overhaul. “Dual agency is legal as long as the parties to the transaction agree, so we’re not allowing behavior that was once prohibited. We’ve put it on the table as one of the objects to pick.”
In the absence of a dual agency provision with designated sales associates on the old form, such arrangements were usually made on the fly. If they were acknowledged at all, it was either through a handshake or by having lawyers from both sides of a transaction codify the arrangement, said Brockbank.
The goal now is to undermine the ability to conduct under-the-table deals that sometimes occur when a seller’s agent and a buyer’s agent share information that can be damaging to a party’s interest.
The requirement to use the state disclosure form only applies to buildings that consist of one to four units, though condominiums and co-ops generally draw up their own forms.
“Realistically, lots of firms out there are very likely going to have this conflict of interest,” said Neil Garfinkel, REBNY’s real estate law expert, who praised the changes.
“In many other states, brokers are there to manage and facilitate the transaction, but obviously this all hinges on the agent not disclosing things about the seller that are beneficial to the buyer and vice versa.”
In New York, penalties for brokers who fail to fill out a disclosure form range from a fine to a loss of license, but firms and brokers are rarely held accountable. The forms are supposed to be filed at real estate offices for three years. The state keeps no statistics regarding compliance, the number of buyers and sellers who choose dual agency or the number of violations that have been considered by the Department of State’s administrative courts.
The new form “is easier for consumers to understand, and it simplifies the process for salespeople to explain agency so that everyone understands the nuances involved and exactly who is representing whom,” said Sal Prividera, spokesman for the New York State Association of Realtors.
Like other states that have “buyer beware” laws, in New York the cards are stacked against home buyers, even though the disclosure form clearly states the difference between sellers’ agents and buyers’ agents, said Gary Herbst, principal broker at Buyer’s Edge Realty in Tarrytown, NY, which represents buyers (see below).
New York consumers shoulder a considerable share of the legal burden in real estate transactions and suffer primarily because there are few true buyers’ agents.
“We have a legal duty to save as much money as possible for the buyer,” said Herbst. “We don’t ever list, so we do much more legwork for our clients.”
Designated buyers’ agents remain rare
In 2005, the National Association of Realtors released a study finding that fewer than one-third of all real estate buyers received disclosures about representation during their first substantial meeting with agents.
While situations in which agents represent both the buyer and seller potentially leave the buyer shortchanged, designated buyers’ agents, who cost the consumer nothing because sellers pay the real estate commission, are still relatively rare.
There are no designated buyers’ agents in Manhattan, said Gary Herbst, principal broker at Buyer’s Edge Realty in Westchester County, due to the absence of a Multiple Listing System, or MLS.
He said listings sheets are often riddled with errors and that he routinely finds mistakes that favor the seller. Those mistakes are both accidental and deliberate, he said. Faulty appraisals, misstated square footage, underestimated taxes and even wrong addresses are common mistakes.
He recalled an accountant who sold his co-op in Manhattan and found a $1.2 million house in Armonk, NY. The accountant remarked to his agent that the taxes she had calculated seemed low. She told him that she went to village hall and got the figure. It turns out that the agent representing the seller had underreported the taxes by 50 percent.
“He sued the real estate company and the agent and lost, under the rationale that this is a buyer beware state,” Herbst said.
Jon Boyd, president of the National Association of Exclusive Buyer’s Agents, said that another limitation with the disclosure system in New York is that there is no indication that the brokerage is not liable for any misconduct, only the individual licensee.