Letter Re: A Home Purchasing Guide For Rookies

Mr. Rawles,
In response to the article entitled A Home Purchasing Guide For Rookies, I feel compelled to set the record straight.  Before doing so, I want to thank you for your factual comments at the end of his letter.

The purpose of my response is to ensure that Survival Blog readers get factual information that they can use in their decision making process.  The author of the article made some unfair and sweeping generalizations about Real Estate professionals in general.  Hopefully he will read and learn from the recent posts about logic and decision making.  Here is an outline of sorts:

  1. Always get pre-approved for a loan prior to looking at properties – if not using all cash.
    1. This ensures that you can make immediate offers when you find the right property.
    2. Not doing so can lead to delays in your offer going out or being accepted and the property may go under contract during the delay.
    3. A good listing agent will insist that all offers are  submitted with a minimum of a pre-approval letter – from the loan officer at the buyers lender, proof of funds – usually bank statements showing seasoned liquid funds that will cover the down payment, and a copy of the good faith deposit – a check that will be deposited into escrow or held by one of the brokers involved in the transaction.
    4. Shop around for your loan – The way you do this is by comparing the APR offered from each lender, not the advertised rate.  The APR includes all of the lenders fees and costs that are passed on to you.
    5. Conventional wisdom says that a 30 year fixed loan is the best loan to get.  While this makes sense in a lot of situations, there are situations where a 15 fixed year loan makes more sense.  There are even situations where a 3, 5 7 or 10 year ARM make sense.  For example, will you sell and move again within 3, 5, 7 or 10 years?  If so, it may make sense to take the lower rate.  Of course, if you are moving to the American Redoubt, you  probably want to go with the fixed rate loan or cash.  As JWR says, “you will not be coming back.”
    6. A good agent will be able to give you a list of lenders that they trust and have good reputations and with loan programs that fit your situation.
    7. You don’t have to put 20% down to purchase a property!  This is one of the biggest myths I hear.  It is probably what your parents and grandparents had to do, but it is no longer true today.  In fact, a lot of people are using FHA loans which require only 3.5% down.  A lot will depend upon prices in the area you intend to buy in, your cash reserves, and your financial strategy.  This can be a huge help for someone buying their first home, or for someone who previously lost their property to foreclosure or sold it short due to a true hardship (usually financial).
  2. Every market is different.
    1. Some locales are actually seeing sellers markets right now.  Here in the San Francisco Bay area we are experiencing a red hot sellers market.
    2. Some locales are still seeing buyers markets.
    3. Make sure you know what kind of market you are in as it will impact how you negotiate and the terms and amount you offer.
    4. Your agent should be able to provide you with data that shows exactly what kind of market you are in and explain why.
    5. Your agent should also prepare you for what you will need to do to purchase or sell in that particular market.
    6. The bottom line is that an assessment of what kind of market you are in can be done based on data, not someone’s word.
  3. Your agent matters!
    1. You get what you pay for on the selling side – Experience, Negotiating Skills, Advocacy, someone who can tell you honestly what you need to do to get top dollar for your property.  It is their job to – protect your interests, get top dollar for your property in the least amount of time with minimal disruption to your life while doing so.
    2. You get what you pay for on the buying side – many buyers agents are newer agents – this is not necessarily a bad thing.  Ask to meet their support system – team leader, manager, Broker, etc.  You will be working indirectly with those folks through your agent.  Some are very experienced agents.  The buyers agents job is to know the inventory that is available, know what your wants, needs and price range are, to preview properties for you before showing them to you, and to get the best price and terms for you. 
    3. In general, the most experienced agents usually handle listings as it is a more efficient use of their time and requires more skill than showing property and making offers.  The newer agents typically handle buyers for the more experienced agents, and are compensated less, but are mentored by the more experienced agents.  Then there are those that do both and do a commendable job.
    4. All agents are not created equal – there are two levels of agents, Brokers and Salespersons.  Both are licensed to list and sell real estate, but the experience, education and level of accountability for a Broker are much higher.  Brokers can hire and supervise sales agents, not the other way around because of the education, experience and level of accountability required to become a broker.
    5. Agents are people – some are good people, some are not.- some are ethical, some are not – some are honest, some are not – some are god fearing, some are not – you get the picture.
    6. Select an agent carefully – Do your research – ask friends and family for their opinions of agents that they have worked with, Hint – the one that you met at church may not be your best bet.  My aunt called me, and told me she wanted to sell her house.  She was having a minor dilemma as she had a good friend at church who was an agent.  I told her to use her friend as her property was slightly out of my area, and I didn’t want her to injure any relationships.  Long story short, their relationship was destroyed anyway as her agent turned out to be very weak and didn’t communicate key dates which lead to delays in closing.   Interview 3 or 4 agents and pick the one that you believe has your best interests at heart.  If you don’t like any of those agents, interview more until you find the one that you are comfortable with.
    7. Beware of discount brokerages!  Use your intellect and common sense.  They are discounting for a reason.  Do your homework before using one of these.  Ask them (and any agent for that matter) for proof of their results.  Again, you get what you pay for.
  4. Laws and what is reasonable and customary change from city to city, county to county, within a county, state to state and within a state.
    1. A good agent will explain to you what these are in the area you are buying or selling in and should be able to show you documentation to support what they are saying.  This information can usually be obtained from a title company.
  5. A good agent understands that they do not sell real estate.  They are a consultant, an advisor and a service provider.  A good agent will admit that trying to sell someone on a property is a fools errand.  The agent doesn’t sell the house, home, property, ranch, farm or what have you.  The house sells the house!  I tell my clients as much. I also tell them that we will both know when a specific property is for them.  I tell them that I will have to remind them of the criteria that they gave me when we did our initial interview, and that this house isn’t a good fit. When  they begin to argue why a particular property is perfect for them, that is the property that is usually for them..  JWR is absolutely correct in that purchasing real estate should be done dispassionately.  My experience both personally and professionally is that most people make the decision to purchase a property emotionally.  Although, there are those that are highly analytical and will stick to their criteria, detach themselves emotionally and make the decision dispassionately.
  6. If you feel like your agent is a used car salesman, fire them.  This isn’t the person you are looking for.  There is a language of sales.  You know what it sounds like.  It makes you bristle when you hear it.  You know when you’re being sold and you know when you are receiving a service.  You should feel like you are receiving a service. 
  7. Knowing that a buyers agents job is to get you the best property for the lowest price and best terms possible, and that the sellers agents job is to get the seller the highest price and the best terms in the time frame the seller wants, you can see that if they do their jobs correctly they will be negotiating with their respective clients best interests in mind,  Using the $100,000 example with a total commission of 5%, the total commission is $5,000.  That gets split 50/50 between the buyers and sellers agents office, so $2500   Each agents office takes a cut, a typical split is 70/30 with each agent getting 70% of their respective offices $2,500.  This works out to $1,750 per agent.  If a buyers agent were to try to talk a buyer into paying $110,000, the agents check would increase to $1,925.  Hardly enough to risk getting a bad reputation over.  In this business, you are truly only as good as your last transaction.  On the other side of the transaction, the sellers agent should list the property at a price that will cause the property to sell in a given market.  If they sell the same property in the example above for $90,000, their check only goes down $175 to $1,575.  In this case they would be doing their client a disservice as well as themselves.  Note that the numbers used are for illustration purposes only and are not typical in most markets.  For example, here our average sales price for the entire office is $400,000 with a 6% commission.
  8. Is there a case when the buyers agent should counsel their client to offer more than list price?  Yes.  Your agent should check comparable sales in the area, and show them to you to help you decide how much and what terms to offer.  If you are in a sellers market where pending sales are a lot higher than the number of unsold properties in inventory, and multiple offers are being placed on properties, you are very likely to have to pay more than list to acquire that property.  Your agent will be doing you a disservice and wasting their time and yours if they don’t show you the data and explain this to you.  Sometimes an agent needs to write a couple of offers for a client to get the client to understand that trying to get a property at a discount in a sellers market is an unworkable strategy.  In a buyers market, the logic is reversed.
  9. Always get at least a general property inspection, a termite inspection and a roof inspection – unless you are a general contractor or know what you are doing  These inspections are done by third parties that can be held legally accountable for missing issues within their area of expertise.  They will also identify areas for additional or further inspection.  In rural areas, you are going to want other inspections, such as septic, possibly well, soil  and others to name a few.  Hint – you can usually get discounted prices for these services if you pay at the time the services are rendered instead of paying through escrow when the transaction closes.
  10. Short sales are currently taking 4 to 6 months to close even for listing agents that routinely perform short sales.
    1. Some short sales move faster, some move slower.
    2. Banks are currently attempting to reduce the time to close short sales through process improvements.
    3. Fannie Mae and Freddie Mac are making it easier for banks and investors to process short sales.
    4. In a buyers market, a listing agent that knows what they are doing will usually price the property 10% below market.  This will allow you to get a good deal, but you will have to wait some time to close.
    5. Short sales cost banks less money to close when compared to foreclosures.  This is because by the time a foreclosure closes, the bank has incurred additional holding costs, legal fees, and maintenance fees.  Foreclosed properties may get broken into and vandalized, and can end up costing the bank even more money in repairs.
    6. A bank does not have to agree to a short sale.  Even though a seller may accept a low offer, the bank is going to have an appraisal performed, and if the appraisal does not come in around the offer price, the bank will usually counter or reject the offer.
  11. If you purchase a foreclosed property, keep in mind that a bank has fewer statutory requirements for disclosure than a seller has in a traditional sale or a short sale.
    1. Do your due diligence!  Get inspections.  Talk to neighbors about the property. Neighbors will often have crucial information about the property that may impact your decision to purchase the property.
  12. Negotiating is about getting to a win-win situation.
    1. Negotiations should be planned.  You will need to know going in what you must get out of the negotiation as well as what you believe the other parties position will be and what they will need to get out of the negotiation.
    2. Negotiations are about finding common ground.  The seller wants to sell the property, and the buyer wants to buy the property.  Think about what could cause both parties to believe that they were treated fairly.
    3. Do not approach a negotiation with a scorched earth policy in mind.  If you do, you will ultimately fail. If you don’t believe me, talk to the Israelis and the Palestinians.  If you are moving to a small town or community, remember that people talk.  You do want to fit in don’t you?
    4. Feel free to think out of the box to make the deal work.  Negotiating is not all about price.  Do you have something of value that you can bring to the table to sweeten the deal instead of paying more?  On the other side of the table, would you agree to a lower price if the other party provided something else of value that you want or need?

There is much more that I could write.  However, I find that the topics addressed above are some of the most common topics that I spend time discussing with people when we are considering working together.  Please understand that the real estate transaction sales cycle is complex and presents many challenges financially, legally, ethically and even morally.  The business is one in which I take great pride in, and get much enjoyment from.  Many of my clients become friends after we have worked together.  I find this especially rewarding.

A disclaimer:  I am not a lawyer and as a result do not practice law or give legal advice.  I am not a CPA or financial planner and do not provide financial or tax advice.  If you need these services, please contact the appropriate professional.  I am licensed to sell Real Estate in California.  I am not licensed in any other state. Keep your powder dry! – Derrick D.