Real Estate 101
A Frank Discussion about "Doing It Yourself"
As an Internet savvy person, surely you have found many new tools over the years to help you to do things yourself, and allow you to "cut out the middlemen." You may be looking to extend this strategy over into real estate. While it is certainly true that many things involving real estate can be accomplished yourself, listed below are a few words of warning that you may want to consider.
Cutting Out Agent Commissions
To eliminate having to pay agent commissions, this site won't help you. Why? Every home listed on this site is listed via the Multiple Listing Service. Only realtors can add home listings to the MLS. This means that the home's seller employed the services of a seller's agent, and in doing so agreed to the standard agent commission, which is usually negotiated between 6-8% of the home's selling price. You will need to investigate "for sale by owner" properties if you would like to avoid dealing with an agent entirely, but it's important to note that the seller bears the responsibility of paying the commission, not the buyer.
Don't Call the Number on the Sign
Should you find a home on this site that you simply can't resist, and are willing to deal with an agent being involved, you might as well make the best of the situation. One big mistake would be to travel to the home and call the phone number on the sign in order to get a tour of the home. To understand why, you must first understand that after January 1st, 1996, real estate transactions in the state of Texas involving realtors legally must employ the concept of "Agency". This means that the agent representing the seller must be declared as the "seller's agent", and the agent representing the buyer must be declared as the "buyer's agent". This does not, however, mean that this couldn't be the same person, but only after declaration to all parties and written consent is obtained. So, back to our example, you call the number on the sign and have the agent meet you to give a tour. If this agent happens to be the seller's agent, their job is to represent the best interests of the seller, so in effect they will be doing their best to "sell" you the home, regardless on whether it is in your best interest to buy the home. However, if you would like to buy the home, then as stated above, this agent can handle the entire transaction, so long as they make clear the "dual representation" that will then occur, and you provide written consent. When this situation occurs, this single agent will earn the full negotiated 6-8% commission . However, this agent cannot offer advice to the buyer, nor can they negotiate on the buyer's behalf.
Get Free Help
Just as a defendant can get free legal counsel, you too can get free representation in your real estate dealings. How? Above I described what happens when one agent represents both the seller and the buyer, generally speaking they usually negotiate between 6-8% of the home's selling price as their compensation. However, to avoid the "dual representation" problem and the natural conflict of interest that is entailed, the law allows for you to get your own representative. This person must be a licensed under the Texas Real Estate License Act, or in easier terms, a realtor or an attorney licensed in real estate can act as an intermediary. When the buyer finds someone to represent them in real estate transactions, this person assumes the role of "buyer's agent", and must legally act in the best interests of the buyer. Since the seller's agent is no longer doing both sides of the transaction, the usually negotiated 6-8% commission is split with the buyer's agent. So the reality is, when the seller employed the services of an agent to help them, they also made allowances for the buyer to have an agent represent them as well, at no cost to the buyer!
Avoid Referral Companies
Unfortunately I can't name names, because referral companies have high-powered legal teams that will sue the dickens out of me. I can speak from experience, as I referenced one of these companies by name through this website, and within a week I received a cease and desist letter from their lawyer. These same companies also have big-time marketing dollars, so you know many of their names already without me having to tell you. The way I define them is a company that makes money on real estate transactions without providing a level of service equivalent to the dollars they earn. Beware: Read the fineprint before signing up with a website to view their home listings. Some websites will let you view their home listings, but then they turn around and sell your name and contact information to various realtors who pay them for the lead. That's just the start of it, though, as many other referral companies allow you to use their site only after you have agreed to their lengthy legal document, which in effect means that if you purchase a home which you first viewed on their website, they are entitled to take a hefty percentage of the commission away from the realtor. You may say, "well, who cares, it's just money out of the realtor's pocket, not mine!" However, it is the realtor that will be driving you around town, examining the properties with you, informing you about the neighborhoods, running comps, dealing with the paperwork, negotiating the deal, and drawing upon the literally thousands of homes they have walked through before to help you find just the right fit for what you are looking for. Realtors provide real service, referral companies provide you with entertaining television commercials.
See the forest and the trees
Many home buyers get far too consumed and obsessed over the wrong things. They will let a home they really loved slip away to another buyer because the seller refused to budge that last $1000 during negotiations, or the seller wouldn't pay for some trivial repairs. It is simply uncanny how some buyers will give up a great deal because they get emotional over the final price. Unless you are a buyer intending on buying your home completely in cash, then you need to understand what a home really costs. Home mortgages are tricky and complicated, which is why the government requires lenders to provide you with a Truth in Lending document, which details exactly how much you will spend for your home if you went through the entire life of the loan, which can be more than double what you thought you were paying. Don't forget, mortgage interest is compounded and front-loaded. Let's take the most simple example, a 30-year fixed rate mortgage at 5%, and you need $200,000 to buy your home. After only two years of paying your mortgage ontime, you will have paid a total of $19,714 in interest alone. Worse yet, you have only paid in $6,132 towards getting that home paid off. Rude awakening, right?
Is negotiating a lower home price the answer?
Every bit helps, but how much? Well, the house you needed $200,000 for slipped away because that darn seller wouldn't budge, so you went with your 2nd choice which ended up being cheaper. Now you only need to borrow $190,000. First, not taking into consideration taxes and insurance, our monthly payment went from $1,074 (for the $200,000 home) to $1,020 (for the $190,000 home). This is a savings of $54 a month. However, our interest payment after two years is $18,729 and the equity built up in the home is only $5,750. The question you have to ask yourself is, was it worth the $1,300 ($54 a month * 24) you saved by going with the 2nd choice home? Or another way to look at this is, would you spend an extra $54 dollars a month to get the home you really want? If we were talking about having to spend an extra $2000 for your first choice home, that works out to only $10 a month!
Is getting a lower rate the answer?
Certainly a lower rate is preferred to a higher one, but waiting and hoping for the rate to drop a quarter point is not the answer if you want to save real money. Taking our example above, if the rate dropped a whole point to 4% over 30 years, your monthly payment would be cheaper, but still after 2 years you will have paid $15,728 in interest, and only $7,188 towards paying the home off.
The answer: Time is money
The real difference is in the effective term of the loan. Time is always on the side of the lender, and just like the credit card companies want you to pay just the minimum monthly payment, so too do the mortgage lenders. There are two ways to reduce the term of your mortgage, either explicitly select a shorter term loan, such as a 15 or 20 year, or by regularly paying in more money on your 30-year mortgage (assuming no penalty for prepay). To compare, take our first example of a 30-year at 5%, if you can pay in an extra $100 per payment, after two years you are still paying in a lot of interest, $19,596, but you will have paid in $8,571 towards the principal. Notice something? Paying in the extra $100 for 2 years is $2,400, but look, you were able to pay in $2,439 towards the principal! All while still paying even lower overall interest. This savings will continue to add up as you will be paying down your principal at a faster rate. Going with a 15-year mortgage vs a 30-year at the same rate is exactly like our example of paying in extra money each month. If you were able to regularly pay an extra $500 each month on our 30-year note above, that would be roughly equivalent to having a 15-year mortgage, and after two years you will have paid $19,113 in interest (banks will always get their money), but now you have actually contributed $18,846 towards truly owning the home, or conversely that much more in your pocket if you turn around and sell the home. In fact, taking 30 years to pay off your $200,000 loan will cost you $386,513, but if you can pay the same $200,000 off in 15 years, overall you will have only paid $284,685, which is a savings of over $100,000!
You can select any real estate agent licensed in the state of Texas to act as your representative, but I have made it my specialty to only deal with buyers. The services I provide are many, including: research, comparative market analysis, scheduling and showing the homes, price negotiation, working with the mortgage lender, home inspector, appraiser, and title company. Feel free to call or write for more information. --Kelly
Cellphone: 972-801-2406
Email: kelly@kellyspicks.com
Or click here to have Kelly call you!