What is agency in real estate and how is it created?

Agency is a legal relationship where one person, the agent, is authorized to represent and act on behalf of another person, the principal, in dealings with third parties. In real estate, agency is most commonly created by a written agreement such as a listing agreement between a seller and a listing agent, or a buyer representation agreement between a buyer and a buyer's agent. Agency can also be created by ratification when a principal approves an agent's unauthorized act, or by estoppel when a principal's conduct leads a third party to reasonably believe an agency exists.