Archive | 3:07 am

Attention Buyers: What Your Real Estate Broker Doesn’t Want You to Know

22 Sep

Tonight’s blog is a sequel to yesterday’s buyer-oriented post.  All right, buyers, here’s what other brokers are going to hate me for telling you.

It’s OK; I’m comfortable with animosity.

No, it really isn’t always a great time to buy. It’s certainly always a great time for you to buy—for your agent, that is.  Though it isn’t always the case, real estate agents are normally paid by the seller on a commission basis.  That means if you don’t buy a house, they don’t get a check.  Is it really in your best interest, then, to take their word on current economic data, mortgage rates, and the like?

Truth be told, most agents are going to assume you’re reading the news, but there are always going to be a few unscrupulous ones who will stretch the truth a little.  I went to an open house a few Sundays, and the agent (a highly experienced broker with years in the business) tried to convince me that I had to buy now before the new real estate sales tax took effect.  This “sales tax” was allegedly a 3.8% federal tax on all real property sales that was part of the recent health care legislation.  One problem:  IT ISN’T TRUE.

Oops.

I can’t say for sure whether this broker was being deliberately deceitful or simply ignorant, but it astounded me that such mistruths were being spoken.  These guys should know better.

Anyway, the moral is, do your own research.  Look at the leading economic indicators for your area.  Look at the trend upward or downward of home prices when compared to rental prices (you’ll see a future post about renting vs. owning; you might be surprised).

Of course, the “right” time to buy is going to be different for everyone.  I sat out the last real estate run-up, renting a house that was costing me less than half the cost of what the mortgage would have been had I bought the house at the peak of the market.  I felt fortunate to ignore the calls of friends and real estate agents to buy now, before I got priced out forever.  I rolled my eyes; I knew that real estate is cyclical, and after every major boom is a major bust.

My house is a 1350 square foot house in a nondescript San Fernando Valley neighborhood. (I mention that only as contextual purposes.)  I bought it as a foreclosure for $225,000 less than the previous owner had paid, 18 months earlier.  Had I drank the Kool-Aid, I would have been the one losing the house instead of benefiting from the crash.  Of course, had I waited even longer, I could have paid less for a similar house, but the important things to me are that 1) I don’t have to stretch to make my mortgage payment, and 2) I’m paying less than I was paying as a renter.

However, money is only one factor.  I enjoy having a bigger yard than I had before, and have enjoyed renovating the house and becoming more involved in my neighborhood than I ever had before.  There is a certain feeling of pride, belonging, and of course stability that having a real “stake” in my neighborhood provides.  That’s something you really can’t put a value on.

Your story will differ.  Maybe interest rates are low now, but it might be worth your while to improve your credit score.  Maybe you expect prices to continue falling, but with your second child on the way, you need more space.  Maybe you need to see whether your new job is going to pan out.  Maybe you don’t quite have the 20% down payment you were hoping to have, but the house you’ve dreamed of owning for years just came on the market.  There are many reasons why it is or is not the right time for you to buy.

Your agent isn’t necessarily “your” agent. I’ll probably have to do another post on agency laws and agency disclosure requirements, because it can quickly get confusing (and, unfortunately, boring).  Some states have slightly different definitions, but in California, there are three types of representation:  1) single agency, where the agent represents the seller only; 2) single agency, where the agent represents the buyer only; and 3) dual agency, where the agent represents both the buyer and the seller. (Dual agency is fraught with potential conflicts of interest, and requires the agreement of both parties.)

In 30 seconds or less, here’s what you need to know.  The fact that you are the buyer doesn’t necessarily mean that your agent actually represents you.  That’s right.  Unless you have an explicit agreement (usually in the form of a written buyer-broker agreement) with your agent, your agent technically represents the seller.  The agent still owes you the duty of fair and honest dealing, but his or her fiduciary responsibility is to the buyer.

So be careful.  As the buyer, make sure you have an agent clearly representing you under option #2 above.

If you’re a buyer, and you’re submitting an offer directly through the listing agent, be aware that the agent can never represent you only, and anything you tell the listing agent (e.g., “Sure, I’m willing to pay their asking price, but I want to make a lower offer first”) can be used against you in negotiations.  That’s a great way to find yourself on the wrong end of the deal.

Commissions are always negotiable. To quote yesterday’s post, “Always!  Always!  Always!”

Agents will tell you that they work for the buyer for free.  You don’t have to pay a dime!  That may be technically true, but remember that the seller typically pays your agent from the proceeds of the sale of the house.  OK, fine, but who pays for the house?

Many people know this already, but for those of you who are new to the home buying process, here’s how it works.  When the seller signs a listing agreement with their agent, the listing agreement includes a certain percentage of the sales price as that agent’s commission.  Their agent will split the commission with whatever other agent produces the buyer.  So if the commission is, x%, your agent gets 1/2 of x% and the seller’s agent gets 1/2 of x%. (Actually, the agents’ brokers also get a cut of the proceeds, but let’s keep it simple.)

Again, this isn’t technically true, but you’re essentially paying the buyer a certain percentage extra for having your own agent.  If your agent’s commission was completely eliminated from the equation, the seller would probably be willing to accept a lower sales price.  Of course, agents do invest considerable time and cost in helping you find a home and navigate through the transaction, so they aren’t going to work for free (unless your best friend or a close family member happens to be a broker).

However, what you might not know is that you can negotiate to get some of your agent’s commission refunded back to you?  It’s called a buyer rebate; familiarize yourself with this term, because it can put money back in your pocket after you close escrow.  Sometimes it’s as easy as simply asking your agent if he or she will give you a rebate.

Now, agents who work for traditional brokerage firms might not have as much flexibility in allowing rebates.  This is simply because many of these firms take a large cut of your agent’s commissions.  However, agents who work for flat-fee brokerages as well as independent brokers themselves can often offer a substantial rebate without sacrificing service. (One more shameless plug—Perkins Realty Group fits into that category!)

Your agent’s “good” inspector or mortgage guy might be good…just not for you. Not surprisingly, most buyers don’t have a handy list of home inspectors, pest control companies, escrow agents, or title companies.  But before you blindly take your agent’s advice, do your own research and make sure these companies or individuals have a good reputation.  A few minutes on the internet is usually all you need.

There’s a difference between an inspector who is good and one who is good for you.  A friend of mine who is a home inspector** in Texas is known—only half-jokingly—in his field as a “deal killer.”  The thoroughness in his job has led to discovery of previously unnoticed defects that affected property values, and has wound up scuttling more than a few real estate transactions because the banks would no longer finance the property.

**(In the interest of full disclosure, I have no business relationship with the aforementioned home inspector.)

His discovering those defects certainly worked well in the buyer’s favor, but there have been agents who have stopped referring clients to him after a deal fell through.

Yep.  Because he did his job well, he lost business. So, who do you think those agents are referring their clients to now?  My guess is they’re calling up an inspector who won’t sink the deal.  The agents still get their commissions, and the owners hopefully won’t get a house that’s about to collapse.

Again, I don’t mean to imply that this is the norm.  It most certainly is not.  Defects found by an inspector who does “too good” a job may cause a deal to fall through, but most agents will recognize that having someone like that on their team will win even more customers.  Most agents will understand how badly their reputation will suffer if their recommended inspector misses something obvious—and expensive.

But do your own research anyway.

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