Thursday, February 22, 2007

A Common Myth of Home Buying



Piggybacking off of my last post, Hiring Real Estate Agents, What's Your Method of Choice? I'd like to address a common misconception among home buyers.

Every couple of months, it seems, I have to talk a friend or family member out of doing this, so I thought I'd share this common myth with the rest of the world.

Home buyers often convince themselves that they will save money by choosing one of two options. They believe that if they A) represent themselves, or B) work with the selling agent, they will somehow save themselves 3% of the commission.

Here is the honest-to-God truth, from someone who does NOT work in the real estate industry: Nothing could be further from the truth.

The reality is, commission is set by a contract between the home seller and the agent whom the seller chooses to represent the home. The selling agent, then, determines how much of that they are willing to share with the "other side", the buyer's agent.

If the agreed-upon commission is, say 6%, a selling agent could very well choose to offer only 1% to the buyers' side. This is unlikely, as few buying agents would leap at the chance to sell a home for 1%. Conversely, if the agent needs add extra incentive to sell the home quickly, they could choose to offer 5% to the buyers' side. During the time I was involved in real estate marketing, I did see several 4% offers to the buyer's side in return for quick sales.

If there is no buying agent, the selling agent keeps the 6% commission to themselves, since that is the contract they have with the seller. A home buyer does not play a role in the contract between seller and seller's agent. And, again, that is where commission is set.

Home buyers are often convinced that a selling agent will reduce their side of the commission of there is no buyer's agent. This is highly unlikely. When it does happen, let me tell you why you should be extremely wary of these folks:

1. You are not adequately represented in the largest financial contract most of us will ever be involved with in our lifetimes. If you choose to allow the seller's agent to have "dual agency", where one agent represents both sides, how good of a deal do you think you're getting in contract negotiations? Particularly if the agent has agreed to do twice the work for half the pay, per your insistence?

2. An ethical agent who will reduce commission and allow you to represent yourself will wind up representing you anyway. Only rookie agents will make this mistake. And a rookie agent will have a hell of a time navigating the complex waters of implied dual agency.

An unethical agent will take advantage of you to the fullest, since he or she will have to explain each step of the process to you, thus creating a lot more work.

No matter how you feel about real estate agents (and I'll state right here that I've got plenty of mixed feelings myself), you need to be represented when you purchase a home.

I'm flummoxed when I hear otherwise rational human beings, people who realize that after a certain age you just hire professionals to do things, suddenly decide to forego a buyer's agent.

Unless you're willing to pick up another full-time job, you're saving yourself nothing. By that I mean that you must be prepared to see homes, navigate inspections, negotiate contracts, etc. and do it well enough to protect what is likely the largest investment in your 'portfolio'.

If you don't do it well enough, you can find yourself in a home in need of serious repairs, in a contract that exposes you to a world of liability, or any number of worst-case scenarios.

I don't know too many people who would drive without car insurance, no matter what the expense. Because the reality is that, if something goes wrong, it goes very wrong. And no amount of money saved compensates for that.

I hope this posting will clear up a widespread myth about home buying. I know a lot of people will be irritated to read this, but I hope that ultimately most people find it helpful.

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