Trying To Avoid The Inherent Contradiction
Readers suggested a topic on buying a house. “Do you really need a re-al-TOR to buy a house? I’m going to start to look seriously in about six months, and I’m a first-time buyer.* I’m pretty sure I’ll need a buyers’ agent, but I’m also trying to avoid the inherent contradiction of buyer’s agents. I want to pay as low a price as possible, but they want me to buy at as high a price as possible for high commission. How do I get around that? (ps I intend to engage a RL lawyer too to help with the documents.)”
“In the DC area, rents are so high that buying is a better deal. Job is stable and will be more stable in a few months, especially if we can get past the fiscal year budget hump. I won’t even look up “realtor” in the phone book at least until the end of this year, and I intend to be very open-ended even after that. If I close within a year I’ll be surprised.”
“Also, I have no intention of paying $280K for a house. That was just a comparison of equivalents. I’m looking between $200-220K, which would be about $920 a month. That’s $1000 a month, which is real money.”
A reply, “Same boat here. Currently in a 3/2 rental for $2100 a month. Similar housing at 300-340k w/ 20% downpayment has $1400/mo cost. Assume piti - deduction = 1400 , net savings of $700/mo + equity build or about $8400/yr. Downpayment of 60k @10% only equals $6k/yr .. Still, I seem to be factoring in another 15-25% price drop I feel is coming in the next 1-2 years and it is making me shy. 15% of 300k is $45k or about 5 years of the savings I would get(more counting income on downpayment). I’m thinking I wait until similar houses are at 270-310 , or about a 10% drop, then if there is a further 10-15% drop my lost saving window is only a year or two… Not too bad.. Plus, it seems more like I am only getting 4-5% out of my downpayment money rather than anything close to 10%.”
One said, “Treat them like used car salesmen. They are not your friend. I recently talked with a Realt-Liar and I was floored when he asked ‘what is your price range.’ WTF?!! I simply said I’m not going to disclose that and to proceed with his work. Silence.”
A reply, “Assuming you are working with one, how are they going to know what to show you if they don’t have a price range? Should they be walking you around 800k houses or around 150k condos? I would avoid the ‘what is the maximum you will pay for this property’ question, but giving a realtor a price range to work with isn’t ridiculous.”
Another added, “They act like they run the show when in fact they are just a coordinator and another piece of the puzzle. Most will bring up interest rates, but they are not my mortgage broker.
They will bring up how well the house is built, but they are not my builder. They will say ‘You can fix that for $100,’ but they are not my contractor.”
“If the house is over my budget they will say ‘Well, you can afford another xxx a month,’ but they are not my accountant or financial adviser. It reminds me of my wedding: The limo guy gave us advice on the Tuxedos, the cake lady gave us advice on the flowers, the lady at the court house gave us advice on our honeymoon….. We figured they were just being nice, but realized they wanted to have their opinion heard. Since they were in the ‘Wedding Industry’ they felt like they could give advice on anything and everything dealing with weddings, but their job title said otherwise.”
“You could find one with your best interests in mind, but they are few and far between. By disregarding their advice on interest rates, builds, tax advantages, and anything else not in their realm you’ll have a better experience.”
‘My realtor here is a nice guy. My age, young kids, good person. He knows I am searching for REO houses and I’m not gonna get suckered into a dump because it has granite counter tops. I’m working with him because I am an easy client and I know what I want. He knows I am planning on low balling REO properties and wont talk me out of it. If I went with some old lady who did this part time she would give me the same old lines of ‘Well, REO really isn’t that good of a deal’ BS.”
“Times are slow in RE, and realtors will take any client they can. If you were one, do you want to waste your Saturday driving all over the place with some dingbat clueless buyer or do you want someone who is very clear on what area/price they want. Like the Syms Department store slogan: ‘An educated consumer is our best customer.’”
One had this, “They are keyholders, nothing more, nothing less. They’re the people who can let you in the door, literally, of the property you want to see. You’ll want to get your own, because otherwise you have to schedule every property viewing with a different realturd, which is logistically difficult, and all of them will try like hell to become your realtor when they find out you don’t have one already. Ask around, and you can probably find a somewhat tolerable one.”
“Tell them your price range overall, but act like every offer you make is final. Never tell them you’ll go higher if need be. Never tell them you’re head-over-heels in love with a property. Always act like you’ll walk if your current offer isn’t met. Remember- they’re all salesmen, and they want you to pay the highest price possible. But they have one good use: they can let you in the door. Act accordingly.”
And finally, “In your business transaction you have to take ownership of the deal. Dictate the terms upfront, spell out the conditions, negotiate the commission and then don’t be afraid to lowball. Please remember don’t ask don’t get. Have fun doing the deal.”
The Spectrum. “Washington County’s residential real estate market has changed dramatically in recent years, creating opportunities for prospective homebuyers and additional obstacles for many sellers. Carl and Lacy Franke said they understand the nature of Washington County’s housing market and have adjusted their outlook accordingly as they attempt to sell their St. George home. Carl said his family’s five-bedroom, 4,040 square-foot home was appraised at about $575,000 in 2007, but he recognizes that the inflated pre-recession value has little significance in 2011.”
“The home is now listed for sale at $389,900, Carl said, representing a steep decline from its prior value. While the value of Carl and Lacy’s home has fallen significantly, Carl said his family would not sustain financial losses if the property were to sell at its current asking price. ‘Everything was so inflated at the time,’ he said, adding that the home’s basement was unfinished in 2007 despite the sizable estimated value. ‘We would have loved to have sold it for $500,000, but you have to be realistic.’”
“Rand McCullough, president of the Washington County Board of Realtors, also serves as a real estate agent for Carl and Lacy Franke. Although the family’s home has been on the market since April without attracting a buyer, McCullough said an average home in Washington is expected to remain on the market for slightly more than 10 months. In late 2009, local homes spent an average of about 20 months on the market, he said.”
“McCullough said homes priced at $250,000 or less have experienced a slight increase in value during the past year while home prices at the higher end of the market continue to fall. ‘These lower-end properties are inching their way up,’ he said.”
“McCullough said approximately 2,300 homes are listed for sale in Washington County, representing an 8 percent decline from last year. ‘This is an excellent sign,’ he said. ‘It does mean our market is heating up a little bit.’”
“While the inventory is declining, McCullough said the 2,300 homes on the market represent a continued ‘glut of inventory,’ leaving prospective buyers with a wealth of options in terms of housing selection. In addition to lower prices and a vast selection of properties, buyers are now receiving more favorable interest rates on their mortgage loans, he said. He said many buyers are obtaining interest rates of about 4.25 percent. ‘During the boom time, 6-and-a-half to 7 percent was a good rate,’ he said.”
“A number of residents with no plans to buy or sell are feeling the emotional impact of watching their home values diminish, McCullough said. While most homeowners who plan to retain their properties have not experienced the difficulties sellers face while trying to sell their homes in a market rife with competition, McCullough said many remain troubled by recent price fluctuations.”
“‘It still bothers the heck out of them,’ he said. ‘It affects everybody emotionally.’”
“Austin Somerville, an 80-year-old retiree, and his wife Connie have lived in their St. George home for four years, and while the market has shifted dramatically since 2007, Somerville said he has not experienced the full force of the housing market’s collapse. After purchasing his current home within the SunRiver St. George retirement community for about $300,000, Somerville said the home’s value has dropped by about 30 percent in recent years, but he has no plans to sell his property in the near or distant future.”
“‘It won’t affect me until I try to sell, and I don’t plan to sell,’ he said. ‘I plan to stay here until they cremate me.’”
If I were looking to buy a house, I would not use a buyer’s agent.
I would use the internet to find houses I might be interested in. I would then contacting the listing agent directly for a viewing. If I found a house I wanted to low ball, I would ask the listing agent to represent me in the transaction for 1% fee with 2% back.
See, the seller has already agreed to pay the 6%, and the listing agent is only expecting 3% of that. Offer them that extra 1% and now they are making 4%. When you decide to make an offer, just add about 2% that you know you are going to be getting back from the 2% fee.
Make sure any contract you sign with the listing agent is only for THAT ONE property and that you are allowed to sign with other agents for other properties.
Throw out an offer that is a good 5-10% below what you are really willing to accept. Don’t start to give until they are within the same range.
If the sellers won’t come down to what you wnt to pay for the first one, just go find another house you want to low ball. Sign up with that listing agent to represent you for that one.
Repeat until someone accepts what you want to pay, or until one of the ones that wouldn’t come down before, changes their mind and agrees.
If you are concerned with the 2% back, just have wrtten up with a lower price but that the buyer pays 4% instead of 6%.
The beauty of this strategy is that the selling agent is more motivated to push for your offer than if he had to split it with another realtor.
There are only a finite number of negotiables. The three big ones are price, financing and property inspection. The rest are pretty much who pays what in escrow.
Generally, the larger the downpayment the buyer comes in with, the better the deal appears to the seller. The seller doesn’t want to go under contract only to discover that the buyer can’t close the deal.
I tried to sell my house FSBO-got blackballed. Then went with limited service, paid a flat fee to get on MLS and offered 4% to buyer agent-blackballed. Went with full service Realturd at 5.5% and it sold. All the Realtors band together to not work with anyone but their own kind. That was in Santa Fe, NM, 2009. They claim it is too much work to buy from a FSBO or limited service listing. I would love to see them all go away, like travel agents.
AV0CAD0
Great post. There are under $1,000 MLS entry and document services online. If you offer 3% to the buyer’s side, you will get the smaller brokers bringing you buyers. That’s how we sold. Up could even up it to 4% and still save. Yeah, you’re right about the boycotts. That is why the DOJ stepped in and won the case against online services needing protections. The NAR got lots of push back of power, the the local corruption is still amazing.
“In the DC area, rents are so high that buying is a better deal.”
I am paying less than half as much in rent than it would cost to buy the 3 bedroom TH I live in and it’s in the DC metro area.
You’re paying half as much rent as it would cost to the buy what you’re living in now. But what if you bought a cheaper house than the one you’re living in? My price point is about $220K with the assumption that the house will need a medium amount of work. By those numbers, yes, my PITI would be lower. And wouldn’t jump 12% a year, as rents are.
Do you really believe that rents will continue to go up 12% a year? What’s that saying about trees growing to the moon?
Mine will go up 12% at least one more time. Last year, the county recommended a 3% rent increase to match cost of living. The apartment complex hiked mine 20% to match the “market rate.” (read: Section 8, military, and roomies shacking up.)
I involved the city in negotiating and we only got it down to 12%, take it or leave. I agreed. So I’m still under “market rate.” So yeah, I expect another rent increase.
Even if my rent doesn’t go up for five years it probably will be higher than a house PITI in my price range. I supposed I could move to a cheaper apartment, but that would be farther out of town, where house prices are lower anyway.
I don’t know about DC but in Phoenix there is talk that apartment vacancies are up these days.
But I noticed my apartment complex has gone “south” in the last ten months. Burglaries have increased. It’s depressing. I pay $941 per month. I am willing to pay $1300 per month to be among educated mobile professionals and I heard that North Scottsdale has a lot of commuters who live in Phoenix and work in other cities.
Many people making these buy versus rent comparisons in favor of buying forget to include the earnings loss on their own equity and the maintainance costs owners must expect. Need to use a simple formula like purchase cost=12x annual rent as a break-even point. Then you can get cute on marginal tax rates, expected holding period, price and rent appreciation/depreciation, and miaintenance free roofs, heating units, do-it-yourself house painting, and the like.
FYI The split is generally:
1.5% Listing Agent
1.5% Listing Broker -always gets paid
1.5% Buyer’s Agent
1.5% Buyer’s Broker -always gets paid
Contracts w/ Broker vary depending on the volume and amt of production of Agent.
Broker Associates usually have more flexibility in their commission structure.
*Generally speaking, the only time you get to make deals on commissions is:
You’re a seller trading up, using the Listing Agent as the move-up Buying Agent. We got a great deal on the Listing Commission once.
*Use a rebate Brokerage
*An Agent willing to tke a haircut due to their experience/hunger. The top producers will not.
This is Ca, but I assume the split is a NAR business model.
My point is the “employing” (1099) Broker has the final say.
This sounds far too complex for me…
oxide
Who were you addressing?
I wish I had your brain power, smarty pants!
Thank you for the “home of the day” links to Z*llow. Always very interesting, informative, and fun.
“A $1,000 cash in an envelope” Theory:
Keep in mind when a Realtor sells a house, the commission is usually 3 percent. Out of that 3 percent, half goes towards the broker and half to the realtor. Then half of that is taken by takes, then 15-20 percent of that goes towards health insurance - so by the time everyone gets their cut, it is much less.
Oxide want a $220K house. He (or she, not sure) finds a great one in Rockville which has all the amenities and location requirements, but it is a REO listed at $380K. H finds a Realtor and looks over the property and says “My offer is $200K, and my absolute limit is $220K.” The realtor has to put in the offer, but in so many words says “It ain’t gonna happen”. “Well, if you can get it to at or below $220K, at closing I’ll have an envelope for you with a $1,000 cash that your broker and Uncle Sam don’t know about. Get this done and it’s yours”.
And why not? Realtors are salespeople and actors. They’ll work more on your behalf and get to that baseline price because “They are getting theirs”.
Sean
Two take aways from your post:
*Real**** aren’t, they are actors (I have the scripts to overcome objections in my files, to prove it.)
*Cash “rewards” aren’t a bad idea.
A comment from my former life as a car salesman (ran a used-car internet department for a Honda store toward the end).
I had someone use the “cash in the envelope” approach on me once. We found a car he wanted, and in my office he tossed a c-note on the table and said it was for me if I gave him a “good” deal.
I reached across my desk, spun my computer screen around to him, showed him my cost on the bottom line, and cut the price down to a 100$ profit. There it was, glowing in green on my ERA-Link terminal, a great deal. He smiled, said he’d rather give that 100$ to me, threw another 100$ on the table and said to drop it to 0$.
I laughed and told him I’d kick it to 50$. He laughed and said 25$, I countered 75$, he grinned and shook my hand with a loud “ok, 50$”.
Mind you, we were talking about a 26,000$ car arguing over pizza-money.
He went to finance happy, wound up buying a warranty, gap, paid almost a point and a half in interest over our approval, etc, and was none-the-wiser that I had generated roughly 3000$ in profit for the dealership front and back (that “cost” line on a used car screen can be easily changed - in my case I simply added a service cost to the back screen, then removed it before sending the deal to finance).
I guess my point is a cash reward is certainly a motivating factor, but it won’t stop a good salesman from trying to pad his pocket a bit heavier.
I put almost half down on my car and the finance guy STILL tried to sneak in $800 gap without telling me. If I hadn’t read articles on car buying I would never have recognized the “gap_ins” on the screen. (I had to crane my neck to see the screen.) He took it off when I asked him to, but he probably wasn’t happy.
(ps I’m a she.)
But you worked for a company that sold cars. Realtors work for a company that works for a company that sells houses. In other words, does a realtor really give a damn what the house goes for? It’s about the transactions and how many times they can sell a house. Outside of being a ‘comp killer’ they won’t care. Paying a hidden commission to certain realtors could save $$$$.
Realtors are paid a percentage on the sale price.
They have reason to care about making that price a bit higher. Every little bit means a heavier paycheck. Considering the state of the market you have to maximize every single customer.
Don’t think for a moment collusion doesn’t occur as well. If your realtor -knows- you’ll go to 220 instead of the 200 you bid, you bet your ass that information is going to end up in the hands of the selling agent. Be smart and share no more information than you -have- to. Never let your realtor you’re willing to go a little higher if necessary. He has every reason in the world to share this under the table, and he will.
Realtors are paid a percentage on the sale price.
They have reason to care about making that price a bit higher. Every little bit means a heavier paycheck. Considering the state of the market you have to maximize every single customer.
Don’t think for a moment collusion doesn’t occur as well. If your realtor -knows- you’ll go to 220 instead of the 200 you bid, you bet your ass that information is going to end up in the hands of the selling agent. Be smart and share no more information than you -have- to. Never let your realtor you’re willing to go a little higher if necessary. He has every reason in the world to share this under the table, and he will.
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Here Here…. Say it again Sam.
Wake up folks…. these corrupt bastards are your enemy. Their very livelyhood is a function of how effectively they get between you and your wallet.
2300 homes for sale in the St George area. That’s just crazy.
When we first moved to Utah 23 years ago, there was hardly that many living down there, total. OK, I exaggerate a little, but not much.
I can give you my experiences from here in Phoenix (and cities around it).
Step 0:
Arrange your financing. Know what’s affordable and don’t stretch yourself to buy a home. We’re in a down market and economy and it’s likely that this home will drop further in value. Try to put yourself in a situation that makes this as safe as possible. Be smart.
Step 1:
I found homes I liked that had recently sold. I took time to find areas I was willing to live in and searched them for sales. Sites like zillow and trulia came in handy here, and I utilized a few different realtors to find information on more recent “comparable” homes.
I was pretty specific in what I wanted: A 3 or 4 bedroom BLOCK ranch style built when people still knew how to properly build a home in the freaking desert (before the stucco wonder-homes with no insulation, huge vaulted ceilings, and ridiculous energy bills). I wanted a low slung roofline, clean lines, a clean not-abused interior, great insulation, a nice yard, a nice neighborhood, and great local schools.
Step 2:
With a bit of information (sale prices of these homes) I would look up their original asking prices. Usually a quick google of the address would net you a listing from before they sold, and realtors could sometimes give me this information as well. Often you could click google’s “cache” button if the listing no longer existed, and get a pre-sale listing. Finally, I would look into rentals in the area and determine what sort of rents were being generated by the properties there.
This gave me a nice feel for the market. What I noticed was the homes I wanted fit the pricerange I wanted, and almost universally sold below their initial asking prices. What’s more, I discovered that these homes seemed to sell at a similar price-point whether they were heavily beaten up or in remarkably good shape. This made my decision fairly simple to only look at homes that were in good shape (the fixer-uppers weren’t enough of a savings to make them worthwhile). I found the price/square foot average for these homes, and determined what I felt would be a “bargain” based upon this. The homes I was looking at were well below 100 * Rent, and had price/rent ratios -well- below 10.0.
It also showed me that short sales were, at least at the time I was looking, almost impossible to actually purchase. Virtually every sold home I found was a bank-sale or private-sale. Short sales simply sat and sat pending until they finally went into forclosure. Your mileage may vary here, but I determined fairly early on that short sales weren’t worth wasting my time on. These listings absolutely clog the system with tons of useless garbage, so I made sure to tell every realtor etc that I worked with to -never- waste my time with a short sale unless it was already completely 100% approved and ready to go.
Step 3:
I started bidding on homes. The key here is to be patient and not deviate from the budget/range that you determined based on your previous research. Realtors will continue to attempt to get you to compromise, or keep sending you listings etc that don’t fit your criteria. Don’t let them get to you. Also, accept the fact that if what you are looking for is a bargain, YOU will likely be the one that has to find it. Almost every home I looked at was one -I- found. Most realtors will simply put you on an auto-generated e-mail list and won’t bother to do actual work toward finding you a home. To this end, the most useful site -I- found was fannie mae’s homepath website. It had a great selection of homes, showing you what was upcoming (not available yet), and you knew straight-off none of them were short sales or otherwise “difficult” purchases.
I missed plenty of bids, but almost always by a very very small amount of money (500-3000$). In almost a year of “shopping” I only once saw a home go for “asking price”, so again, don’t be afraid to bid a price closer to the values YOU have determined are fair.
Step 4:
Calm your wife down.
Easier said than done, I know. My wife was becoming extremely anxious as time went on and we lost bids on home after home (she was in hardcore nesting mode after we had our son). I know all-too-well what effect this can have on someone. I have no specific advice on this for you, but I myself kept her on the straight and narrow with a combination of romance and reasoning :).
Step 5:
Eventually, you will find a home where there aren’t any other bidders or nobody outbids you. Enjoy it. You’ve earned it. I found the perfect home in Gilbert, AZ. Beautiful neighborhood, nice neighbors, nice home (perfect shape and move-in ready), some of the best schools in the state nearby, fairly close to work/fun. I couldn’t be happier, and my mortgage + bills is SIGNIFICANTLY less than I was previously paying to live in a small 2 bedroom apartment in Tempe. My mortgage is -half- the going rent in the area with a very modest down payment. It took awhile to find it, but it was worth it. I wound up paying a price/sq foot similar to what this home sold for in 1992!
I feel my purchase is well hedged against the future - further significant price declines will likely only occur at this price point if credit dries up/raises substantially in rate. Even if this occurs, my buy-in at such a low price and rate means I can simply keep the home and continue to save compared to area rents unless said rents absolutely collapse 50% or more. It’s affordable enough that I cannot conceive of a moment where I would be unable to afford it. If a collapse occurred that -did- make this a BAD decision, I have a feeling the least of my worries would be what I paid for my house.
Lastly, a small observation I had from the greater phoenix area. There is a -huge- difference in the quality of home you can buy within a small range of prices. In other words, the difference between a 180k home and a 200k home can be extreme. Take the time to find these “cut-off” points, as they represent points of affordability and can net you a bargain. YMMV.
thank you Ncinerate. I’ve saved you comment on my computer.
No need to calm the wife down, btw. My only hurry is that I will likely have to pay higher month-to-month rent while I’m looking. I don’t want to lock into another 1-year lease.
Of course you don’t :). Might need to calm down the husband though, assuming you have one!
I meant that step in jest though, my wife is amazing, she just started getting a little depressed when we lost a few nice homes by small amounts of money. She wanted me to bid just a BIT more to win one, but I convinced her to stick to the guns and it wound up working out much better for us in the end.
We were actually kind of lucky on ours; we underbid by a significant amount and got a note back from the listing bank that “somebody else was interested.” As that particular property had been listed for eight months with nary a nibble, we laughed, said “sure they are” and didn’t budge. They countered below what we were willing to pay, so we made a token counter-counter and ended up with a price we were fairly happy with.
About the only regret that I have is not realizing that “well-established neighborhood with lots of original owners” equates to “nobody else has toddlers.” It’s pretty depressing to go to the playground and be the only ones there; my son keeps asking where the kids are. ;(
Ncinerate:
I am a Realtor and must say your post is pretty darn good. I agree with most everything you say here. Most of the other comments I have read (in my opinion) are either mentioning doing things that are illegal or don’t depict the reality many agents operate (at least the good/ethical ones). But your post is pretty much spot on and accurate.
I could buy a 3/2 in Largo or Clearwater (in a decent ‘hood) for $115k right now, but my wife refuses to do this.
From my perspective, I think every Floridian needs to wait a year or so to see how much damage Gov. Scott’s (Florida’s own vampire squid wrapped on the face of Florida humanity) deregulation of the insurance industry does to Floridians’ wallets.
“Most will bring up interest rates, but they are not my mortgage broker.”
The last used home seller we talked to suggested an interest-only mortgage. That was right around the time we decided to become San Diego renters — late 2004.
“‘It won’t affect me until I try to sell, and I don’t plan to sell,’ he said. ‘I plan to stay here until they cremate me.’”
Austin…you’ve already been burned..!!