How to buy a house
80% of home buyers find the home they want to buy on the internet and without a Realtor. However, most of those buyers, even the “do it yourselfers,” end up unwittingly forfeiting their right to get their own buyer broker and end up putting thousands of extra dollars in the listing brokers’ pockets. There are things you can do to protect yourself and CAARE wants to help. We are the only non-profit charity in the nation dedicated to consumer protection in the real estate brokerage and title insurance industries.
Be an informed buyer and learn about some of the tips and traps of buying real estate. Here is a step by step guide on how to buy a house.
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First, before you consider picking a real estate agent, pick your own investigative professionals like an attorney, home inspector, lender, and title company. Realtors who tell you that you do not need an attorney are breaking the law. Avoid recommendations from Realtors when selecting these professionals because Realtors are financially motivated to steer you towards professionals who will “rubber stamp” your deal so that they can collect their commission. Professionals who receive referrals from Realtors will be less likely to call attention to problems that could severely impact you later on.
And don’t forget, the real estate industry in the United States operates like a cartel. You do not have to be another victim of their anticompetitive forms and practices. Be a savvy consumer and read our advice. You can save a lot of money and transact your residential real estate transaction more safely. Good luck!
A good real estate attorney can help you negotiate your Realtor fees and terms of representation and be instrumental in protecting you throughout the process. Some state bar associations have a specialist certification for real estate attorneys. Quiz prospective attorneys about their conflicts and try to find an attorney that does not receive a lot of agent-related referrals. Some attorneys routinely represent real estate brokerages and agents and receive lots of referrals from agents. Those attorneys are the most likely to look the other way when there is agent malfeasance. More about attorneys here: Real Estate Attorneys. Once you find an attorney, show them CAARE’s website.
Compare lenders by obtaining fee quotes on your expected loan amount Identify which fees are lender fees. Lender fee quotes often include fees from other service providers and government entities. There is no need to select a lender now. Have a lender help you determine how much house you can qualify to buy and how much house you can afford (they are very different questions and have huge implications). Do not get in over your head! Consider all the additional costs of home ownership (there are many) and the things that might impact your ability to pay back the mortgage (starting a new family, loss of a job, medical emergency, unexpected and unrelated life expenses) and a select a home at the lower end of your affordability range. Some couples who might qualify on two incomes ask to only qualify on one income in order to better prepare for most eventualities. Many people will qualify to buy a house for which they cannot afford. Find an independent advisor to help you determine how much you can afford. Loan officers who receive referrals from Realtors are more likely to serve your Realtors’ interests than yours. That means they are financially motivated to avoid giving you good advice and are more likely to look the other way when it comes to including important information on your loan application. Loan officers and Realtors are incentivized to persuade you to borrow more than you can afford and their advice often is not reliable. The more you spend, the larger their commissions. When you are ready to lock-in your mortgage interest rate (after you sign your agreement to buy a house) compare lenders a second time and then make your lender selection.
DETERMINE YOUR BUYING STRATEGY.
If you are a savvy home buyer who is willing to do the research and you want to do most of the work yourself, then you need to be aware of all the financial traps Realtors set. Walking into an open house without your own agent or setting up a showing from a listing you found online could cost you thousands of dollars in commission savings and cause you to forfeit your right to representation later on. Open houses are traps and should be avoided. We have developed an Open House Form that may help. Click here to learn more:Open House Form. Homebuyers who want to set up their own showings may be best served by retaining a buyer agent from a small firm on an hourly basis and negotiating to have the balance of the commission rebated back to them. Find a broker who rebates here: Broker Rebates.
Whether you want a full service brokerage or you want to do it yourself, you will be best served by finding a highly qualified agent from a small brokerage firm. Hiring the broker/owner of that firm might also have its advantages (the broker does not have to share the commission with other agents). Agents from small firms can avoid the conflicts of interests that almost always exist at large firms and their practices and forms are typically less predatory. Small firms have the same tools and access to the same real estate data as large firms and are often much more prepared to provide customized service and terms of representation. Large firms cannot offer meaningful representation, they have outrageous junk fees, they use fee agreements that lock consumers into unfair terms, they steer clients into over-priced and conflicted ancillary services and they are less likely to negotiate their fees and terms. Large firms should be avoided at all costs as they exist to prey upon their own clients’ vulnerabilities. Check out our Pledge of Allegiance to Buyers (it may not be complete, but it is a good start).
Some brokerage firms only represent buyers and avoid the substantial conflicts of interest that are inherent at firms that also represent sellers. An Exclusive Buyer Broker often has specialized training in representing buyers and can be far superior to ordinary agents when it comes to understanding their fiduciary responsibilities to their clients. However, watch out for fake buyer agents who work for firms that also sell properties. In many states there exist laws that allow agents to claim they represent buyers while their firms represent both buyers and sellers. This is called Designated Agency and it is very bad. The brokerage firm has access to all your confidential negotiating information as well as the seller’s and stands to earn a double commission (that is a lot of money) if they use your information against you to manipulate a deal. Also, there is a Trade Association called NAEBA (National Association of Exclusive Buyer Agents) that can refer you to a buyer agent in your area, but they charge a hidden and very substantial fee to the broker they recommend. That money could be yours if you find your agent on your own or use our free list of Exclusive Buyer Brokers: List of Exclusive Buyer Brokers.
Negotiate the Terms of Your Broker Representation.
The real estate industry may be the only profession in which all the competitors have gotten together and designed standard fee agreements and terms. That means that these agreements are anticompetitive and designed to protect Realtors, not you. DO NOT sign these agreements without thinking about making substantial changes. Large brokers typically won’t negotiate, but small brokers often will. We have an entire post about Buyer Representation Clauses (click here).
- When is the Fee Owed? Most fee agreements state that you owe a commission once you find a house and make an accepted offer. At the very least, a commission shouldn’t be payable until you have a successful closing. If things fall apart do you really want to give your agent the ability to sue you for a fee that they didn’t earn?
- No Dual or Designated Agency. It is illegal for ALL other professions to engage in dual or designated agency. We mean it when we advise you to stay away from ALL large brokerage firms. One of the reasons is that they all engage in these horribly conflictive relationships.
- Find me a Title Company that isn’t Related to your Broker, you and doesn’t have Enforcement Actions. Realtors used to engage in some due diligence in the title company selection process. They would recommend three firms that they weren’t related to. Now they give consumers two choices. Pick my firm or go find your own. Obviously few consumers know how to select a title company. If you see this in your fee agreement, add a third option – get me quotes from three title firms that are independent of affiliations and that compete on service and price.
NEGOTIATE THE TERMS OF YOUR BROKER REPRESENTATION
If an agent tells you they work for free, walk away from that agent. They are lying and trying to use that lie to prevent you from negotiating their fee (not a good start to a fiduciary relationship). Buyer brokers’ fees are negotiable, especially if you go to a small firm. And remember, if you use a small firm there will be many other advantages to you. You are decreasing the chances of being exposed to dual or designated agency, less likely to be steered to an in-house lender or title firm and if you work directly with the broker/owner you are likely to get a more experienced agent who doesn’t have to share their fee with the firm.
Unfortunately, the brokerage industry has set up an unnecessarily complex fee structure to prevent buyers from negotiating their fees. If you are a buyer and want to negotiate your broker’s fee, consider the absurdity of how you need to negotiate that fee. You the buyer pay the seller for the house. The seller than pays their listing broker who then shares their fee with your buyer broker. Your buyer broker completes the circuit by paying you the rebate you negotiated. Rebates aren’t some extra bonus you get at closing. Rebates are the ONLY way you can negotiate with your buyer broker.
It is the buyer who brings the money to the table that the seller uses to pay your broker. The reason buyer broker fees are structured this way is that Realtors want to force you to pay for a buyer broker whether you use one or not. The National Association of Realtors even has a standard of conduct that makes it “ethical” for a buyer agent to tell you that they work for free. The entire industry, nationwide, is in on this conspiracy to overcharge you for buyer brokerage fees.
In places that are not infested with anticompetitive practices, it costs far less to buy or sell a house and you get far superior service and skill. This is why in Europe it only costs 2% or less to sell a house – you are not forced to pay for a buyer broker. This convoluted fee structure is a form of price fixing and has robbed millions of home owners of their equity. Unfortunately, if your buyer broker doesn’t collect the amount being offered by the seller’s broker, the seller’s broker will pocket the entire amount adding thousands more to the cost of your house.
Just because your broker may be receiving money (on your behalf) from the seller, does not mean you can’t negotiate that fee. You can and you should! It should be you who determines how much your broker gets paid, not the seller or their broker. That fee should be commensurate with the level of service you are expecting them to provide and how many hours you are expecting them to dedicate to helping you acquire your house. Remember, their services include only brokerage services and that should not include compensation for attending or arranging closing (don’t let them arrange your closing). They are not lawyers and their presence at the closing is unnecessary. If you utilize their services wisely and don’t ask them to show you 50 homes and you are planning on doing the majority of the searching yourself (most buyers do), then consider offering them a flat fee or an hourly rate. Ask them to rebate the difference between how much they collect from the seller and their compensation. This can often amount to many thousands of dollars. We have a list of brokers who rebate their fee (this is one of the only ways to negotiate the buyer broker commission) that you can find here: Buyer Brokers Who Rebate. The United States Department of Justice is a huge fan of this technique for negotiating the fees and they even a webpage dedicated to calculating your savings: DOJ Rebate Calculator. Unfortunately the Realtor Association has been successful in legally prohibiting rebating in some states effectively fixing buyer brokerage fees. Here is a list of the states where price fixing is illegal and you will need to find another way to negotiate your broker’s fee: List of Eleven States that have Legalized Price Fixing for Buyer Brokerage Fees.
Realtor and Mandatory State Fee Agreements (drafted with the “assistance” of Realtors) are all self-serving forms that are designed to protect real estate licensees from consumers who want to negotiate the terms of their representation. Follows is a partial list of some terms that are often included in these forms that you should consider changing with the help of an attorney. You can also find additional ideas here: Some Consumer Friendly Contract Clause for Your Buyer Representation Agreement. Especially watch out for forms provided by large firms and builders.
- NO Dual Agency or Designated Agency Never agree to either of these forms of “representation” that is really no representation at all. Both are legalized forms of betrayal. Realtors are the second most powerful lobby group in the United States and have been successful passing laws that make this form of representation legal ONLY for them. Consider the fact that attorneys who are trained in conflict management cannot legally engage in dual agency in most circumstances. In fact, a law firm could not represent the buyer and seller in the same transaction. It is considered to be fraud. Pick a small firm that does not practice dual or designated agency. Here is more about dual agency: Dual Agency and More About Dual Agency.
- Say NO to Arbitration Clauses Many brokerages bury arbitration clauses in their Fee Agreements (aka Buyer Representation Agreements) and their clients unwittingly sign them. Have it stricken or go to another firm. Arbitration clauses are there to protect brokers from you. They typically forbid clients from starting class action lawsuits, they keep disputes private, the costs to file an arbitration are often outrageous and many of these clauses require you to use an arbitration firm under contract with the broker.
- Watch Out for Junk Fees and Strike Them More than 10 years ago, most brokerages started charging additional fees on top of their already price fixed and outrageously high commissions. They go by a variety of names and are often buried in the contract. And even if you do strike the junk fees, if you use your broker’s title company (we highly recommend that you do not) they will often automatically charge you.
- Say NO to Using Your Loan Officer’s/ Agent’s/Broker’s Title Company. These clauses are often buried in the Realtor’s Fee Agreement and often not disclosed by lenders until it is too late. The choices provided to clients are typically very unfair – use our title company or go find your own. It used to be the case that Realtors would investigate title firms and provide their clients with a list of three firms that they had vetted. That option is not on any of the contracts we’ve seen (but you could include it). We have seen some lenders refuse refinance borrowers their right to choose their own title company. Ask your lender before you start working with them and consider this a valid reason to select a different lender. A title company investigates and examines the title of real estate and is an important decision maker as to whether or not your transaction should close. You do not want to buy a home riddled with title defects. A title company owned by a brokerage firm that might have a large commission riding on your transaction closing might have no problem in sending you home with a title defect that will ultimately need to be settled between you and the title insurance underwriter. Also watch out for title firms that have cozy relationships with Realtors. Kickbacks are a terrible legal problem in this industry. Title companies often compete for Realtor and lender referrals by treating them to all kinds of illegal spiffs. It is the consumer who ends up paying for these spiffs in the form of higher prices and other hidden costs. We recommend that you choose a truly independent title company (one not affiliated with Realtors, brokerages, lenders, builders or attorneys) and look them on the www.bbb.organd the state licensing authorities for licensing violations. Here is more about title companies: Watch Out for One Stop Shopping and Affiliated Title Companies.
- Prohibit Your Broker From Collecting Bonuses From the Seller! If you see a clause that says buyer broker bonuses offered by the seller are considered earned and the property of the buyer broker, walk away. They are asking your permission to taint your representation through your approval of them collecting a bribe. The only person who should be able to offer your Broker a bonus is you. A bonus from the seller (especially hidden bonuses) fits the definition of commercial bribery in those states that have such laws. Fiduciary law often requires that all ancillary profits earned in the representation of a client belong to the client. In other words, buyer brokers should not be asking you if it is ok for them to receive a bonus from the seller. They should be telling you that the bonus belongs to you. Buyer Broker Bonuses are routinely offered in many states through hidden fields in the MLS system that only Realtors can see. These bonuses are often for enormous amounts of money. More about buyer broker bonuses here: A Free Lexus? or Buyer Broker Bribes.
- There is so much more. Home Warranties are the most complained about service on Angie’s List and Realtors and brokerages receive hidden fees for forcing these on their clients through “standardized” forms. Hidden referral fees that brokers collect when they refer a client to another brokerage. These often amount to 25% of the commission for little more than dropping your name. Protect yourself by prohibiting these things in your Representation Agreement.
FINDING YOUR HOME.
Search www.Zillow.com, www.Trulia.com, www.Realtor.com and websites of individual brokerage firms that might be concealing listing data from the other sites.We prefer Zillow because Zillow includes For Sale By Owner homes. Many agents and brokers try to boycott Zillow and unfairly and incorrectly claim that Zillow’s data is stale. If there is any stale data on Zillow, it is only because some Realtors intentionally send bad data to Zillow. However, our research indicates that Zillow’s data is complete. Realtors feel threatened that Zillow might revolutionize Realtors out of their over-priced commissions. Not likely since Zillow depends upon Realtor advertising as their business model. Warning: Do not set up showings without reading the rest of this section. According to the National Association of Realtors over 80% of home buyers find the home that they buy without the help of a Realtor. Unfortunately, most of those same homebuyers forfeit their right to representation and the buyer brokerage fees that could have been saved by failing to properly set up showings.
If you set up a showing with the listing broker or attend a listing broker’s open house you could be forfeiting your right to negotiate your broker’s commission and your right to representation. If the seller’s broker feels that they are the procuring cause of you buying the house and you were not represented by another broker, that could create a commission dispute between brokerages that could deprive you of your rights. This risk is rarely disclosed to consumers. Many states require listing brokers to inquire whether or not you are under contract with a buyer broker and prohibit them from interfering with your brokerage fee agreement. So one way you might be able to go see properties without your broker and without forfeiting fees and representation is to first hire a buyer broker by the hour (with a rebate clause for the difference) and then start calling listing brokers to view their listings (check the laws in your state). Here is some more information on this issue: The Open House Trap and Searching Online .
Hire Your Own Independent Title Company. Avoid title firms that are affiliated with Realtors, Lenders, Attorneys, Brokerages or Builders. A title company investigates and examines title and makes incredibly important decisions about your closing. That process should not be frustrated by inappropriate relationships with parties who have a large fee riding on your transaction closing. In addition, the best way to insure that firms are competing on price, service and product is to avoid these relationships that exist to destroy competition by preying upon fiduciary relationships. Here is a list of independent title companies: Independent Title Companies and here is information about a non-profit national trade association dedicated to solving this problem: www.NAILTA.org.
Click Here for List of Additional Home Buyer Tools: Buyer Tools