However, when you’re already saving up for the biggest purchase of your life, it makes sense to ask one major question before hiring an agent: How is this person going to get paid?
There’s good news for you as a home buyer: Both the agent representing the seller and the agent representing you, the buyer, will be paid out of the seller’s proceeds at closing. Although you pay the seller for the house, you don’t need to add anything in for the agents’ pay, because the seller typically is responsible for paying the agents involved. Although the agents can be paid a flat fee if that's what the parties negotiate, more often the agents are paid on commission—a percentage of the selling price.
One of the biggest misconceptions that buyers have is that they’ll save on agent commissions by having the seller’s agent—commonly, the one you meet at an open house, or talk to if you call the number on the “For Sale” sign—handle the entire transaction.
This is called “dual agency.” And while the agent might offer to bring the home price down a tad to compensate you for not bringing your own agent, that supposed savings might be offset by not having someone who will put your interests first and negotiate accordingly.
Dual agency is not allowed in many places, as it can create a conflict (either perceived or real) when you have the same person attempting to advocate for both sides. In some parts of the United States, the same agent can represent both sides as a “transaction broker,” where the person steps away from being an advocate for either side and simply mediates the transaction. This arrangement can also be tricky, as the real estate agent might find it difficult to let go of the advocate relationship he or she might have previously developed with one side.
Regardless, whether someone is working as a dual agent or a transaction broker, it is often the case that the agent will simply take the full commission offered to both sides anyway, which leaves the buyer and the seller in the same position. If you decide to work with the home seller’s agent, tread very carefully and ask a lot of questions.
Say a house is advertised for sale for $400,000. You are interested in it, and ask your agent to help you take a closer look, and possibly help you make an offer. The sellers, meanwhile, have already agreed with their agent upon two things: how much both the seller’s agent and the buyer’s agent will be paid. The latter amount is usually posted on the local listing service accessible by agents.
Most likely, both of these amounts will be a percentage of the sales price. Sometimes the total commission is split evenly, and other times one side might be offered more or less than the other, depending on the parties’ motivations.
For example, a seller who wishes to add an incentive to buyers’ agents to show the property might pay his agent 2.8% of the sales price, but offer the buyer’s agent a higher rate, at 3.0% of the sales price. More commonly, the seller's agent will charge 3% and offer the buyer's agent 2.5%, in recognition of the fact that the seller's agent spends many times more hours on the deal, and invests in marketing and so on.
On average, you will see percentages in the ballpark of 2.25% to 3.5% offered to each side. Still, this is always negotiable, and there is never a “standard” rate.
If, continuing with the example above, you offer to buy the house for the list price amount of $400,000, then, the seller’s agent will be paid an $11,200 commission, and your agent will be paid $12,000.
In the days leading up to the closing of the home sale, your agreement with the seller might change. For example, if the appraiser hired by your lender says that the house is worth $50,000 less than you offered for it, the seller might agree to a price reduction (though it would be equally possible that you would be asked to come up with a higher down payment to make up for the difference in what the lender will agree to owe you). Or perhaps inspections will reveal a major flaw in the house that warrants a reduction in price.
In either case, the agents involved in the transaction might receive a lower commission as a result (taking a percentage of the final purchase price).
However, another common scenario is for home defects to be dealt with separately. So, let’s say the seller agreed to credit you $5,000 for repairs to the property. The credit will be handled at the closing, while the agents will still each receive their respective percentages of the agreed-upon sales price. The real estate agent’s commission is based off of the final selling price, regardless of credits, taxes, inspection costs, and so on.
Even though the commission amount for the buyer’s agent is determined by the seller, as a buyer you might still have some flexibility in the amount your agent gets paid. For instance, if you strongly feel that your agent has not represented your interests or you find out that the agent has made a major mistake, you are free to ask that your agent credit some of the commission to your costs at closing. This is not a common occurrence, but can and does happen as a method of remedying certain issues. Keep in mind that an agent is under no obligation to cut his commission at closing, but it is something that you can discuss if you feel you have a strong reason for the agent to credit you. If you and your agent agree upon any such reduction, it must be cleared with your lender prior to closing.
]]>True, you’re probably already getting related advice from your real estate agent, mortgage broker, and possibly a lawyer. But they’re not focused on the big financial picture. Many buyers end up jeopardizing their children's education or their own retirement by following the standard advice of mortgage brokers and real estate agents, who will tell you the maximum you can afford without taking your other life circumstances into account. In contrast, a good financial advisor will take a more comprehensive look at your situation before offering advice, as described here.
A good financial advisor will help you ask the right questions before buying a home. For example, though you might be most interested in the mortgage you qualify for, a good advisor will prompt you to ask, “How much home should I buy, given all of my short and long-term goals and objectives?”
This is the beginning of a discussion that puts your home purchase in proper perspective alongside every other financial goal competing for your limited resources. The discussion should address such questions as:
All of these are important both for present and future concerns.
There are no perfect answers to any financial question, including home-buying questions. Instead, there’s an ever-changing continuum of potential risk and reward that must be thoughtfully navigated. The advisor’s job is to help you properly manage both risk and return, so as to help you arrive at solid answers within the context of your overall financial picture.
To find where a home purchase fits into your overall financial plan, advisors often use a framework that attempts to tie everything together in a cohesive and comprehensive way.
A fine example of this is an approach developed by Charles Farrell, J.D, LL.M. He recommends viewing mortgage debt, for example, in terms of how it can facilitate (or inhibit) one's transition from laborer to capitalist. Thus, mortgage debt is acceptable (you need a place to live after all) to the extent it doesn’t get in the way of achieving a target savings level—specifically, the amount you need to save to stay on track toward becoming a supplier of capital.
For example, for a home buyer at age 40, Farrell recommends keeping mortgage debt at less than 1.8 times annual gross income. That might seem a tad frugal; but, based on his calculations, this will generally preserve your ability to save a recommended 12% of gross income. He nudges these figures to 1.7 and 15%, respectively, at age 45.
A financial advisor can help you balance what you want most with what you want at the moment, helping you understand how buying a home might impact other priorities later on. For example, taking on too much mortgage debt can make reaching eventual financial independence more difficult—particularly if things go wrong. Debt means leverage, and leverage means risk. Remember, leverage amplifies mistakes, so you need to approach it with caution and with your eyes wide open.
Considering that jobs can move out of state, divorces happen, and houses don’t always go up in value, it might be worth your time and money to have a discussion with a financial advisor about what buying a home might mean for you both now and in the years ahead.
Currently, there’s no restriction on who can use the title “financial advisor,” which is why so many do. Personal bankers, stock brokers, insurance agents, mortgage brokers, and many other sales professionals often (questionably) market themselves as financial advisors. Most lack any graduate level training in finance and instead carry sales licenses arming them to distribute financial products on commission throughout their distribution channel (that’s you). This arrangement is less than useless when you need advice from an actual financial professional rather than a product.
Unfortunately, the vast majority of people calling themselves “financial advisor” are anything but. Even among traditional financial advisors there’s strong disagreement about what it means to be an advisor. For example, as a fee-only financial advisor, I’m leery of the term “fee-based advisor.” That term sounds less salesy than “registered representative,” however, it’s essentially another term for sales professional as they accept fees and commissions.
As a fee-only advisor, I’m among an admittedly small minority (at least small in this country) who believe advisors should never be allowed to personally profit from their own advice through product sales. The idea is, as legal fiduciaries, it’s best for advisors to invoice clients directly for advice. This maximizes transparency and dramatically reduces (but does not completely eliminate) conflicts of interest. For more information, The National Association of Personal Financial Advisors (NAPFA) is a good place to start.
Keep in mind that even though all fee-only advisors offer transparent pricing —importantly, quoted in dollar terms—fees for ongoing service might be based on account size. That means the advisor will lose revenue if, for example, the client makes a large withdrawal for a down payment on a home. For this reason, when you have a specific issue to address, it’s often best to find an advisor who offers advice on an hourly or project fee basis.
]]>In an ideal world, a home inspection should be included in your purchase contract as a condition of closing the sale (a "contingency"). But not all buyers ask for it. Here, we'll discuss the how's and why's of getting a home inspection.
No matter how good the house looked, or how savvy your real estate agent, it takes a professional to test and prod for hidden defects. Even if the seller provides you an inspection report, it's best not to rely on this alone. The seller might have chosen an inspector who's not known for rooting out problems.
You'll likely want to hire at least one and possibly more professionals to check out the building's structure, systems, and physical components, such as the roof, plumbing, electrical and heating/cooling systems, major appliances, floor surfaces and paint, windows and doors, and foundation, and detect pest infestations or dry rot and similar damage. The inspector should also examine the land around the house for issues concerning grading, drainage, retaining walls, and plants affecting the house.
In many states, such as California, sellers are required to disclose considerable information about the condition of the house itself and potential hazards to the property to prospective buyers. (See Required Disclosures When Selling U.S. Real Estate.) Review these disclosures yourself, and make a copy available to any inspector you eventually hire.
But the contents of the disclosure are just the beginning: Not all sellers know about problems with the house or honestly disclose them. Sometimes they've lived with a problem for so long, such as low water pressure or a jiggly door, that they've literally forgotten it's there!
In tight markets, buyers are known to waive (not add to their offer as a condition of sale) the inspection contingency, so as to make their offer more attractive to the seller. Including the contingency could, in such a case, drop your offer to the bottom of the pile. It's a risk you'll have to evaluate with the help of your agent.
The more problems you can spot on your own, and the greater severity they seem to represent, the more you might want to hold firm on getting an inspection.
One middle-ground option is to condition the sale on what's known as a "yes/no" inspection, meaning that you can use the results as a reason to back out of the deal entirely (with the assumption that this you'd do this only because something major turned up) but won't use it as a basis to negotiate for price reductions or repairs.
Most buyers get professional inspections only after they're in contract to buy the property. The closing of the deal is commonly made contingent on the buyers' approving the results of one or more inspections. The buyer arranges and schedules the inspections.
Before paying for a professional inspection, you can conduct your own informal inspection. Look for issues like sloping floors or bowing walls, signs of water damage, missing roof shingles or gutters coming loose, old or low-quality fixtures and appliances, and other signs of wear, tear, or needed repair. The best time to do this is before you make an offer, so that you can save yourself the trouble should you find serious problems.
You'll find a checklist and further instructions in Nolo's Essential Guide to Buying Your First Home.
Another, less commonly used possibility is to ask the seller to let you do a "preinspection" before submitting your offer. Why, given the cost of these inspections, would you do this?
Because if you're in a situation where you're competing against other buyers (which can happen in any market, if a house is particularly desirable), this can help you set your offer apart. You'd most likely be able to submit an offer without an inspection contingency, thus reassuring the seller that your offer price is firm, not something you're likely to whittle away at after you're in contract, based on whatever a later inspection reveals. (On the other hand, you risk coming in with an offer price that's lower than others', having taken the house's problems into account; which only you know about at that point.)
Some sellers will refuse to allow preinspections in any case, particularly because, if you alert them to problems with the house, they're then likely obligated to divulge these to other potential buyers as part of their state's disclosure laws.
Hire a general contractor or home inspector to inspect all major house systems, from top to bottom, including the roof, plumbing, electrical and heating systems, foundation, and drainage.
This will take two or three hours and likely cost you $300 or more, depending on the location, size, age, and type of home. Accompany the inspector during the examination, so that you can learn more about the maintenance and preservation of the house, ask questions, and get a real sense of which problems are serious and which are relatively minor. The inspector will write everything down on the report, so reading it can be a bit scary if you hadn't already seen that, for instance, "cellulose against the foundation" just meant a pile of old leaves that you could easily remove.
In addition to the general inspector, it's wise to hire a licensed structural pest control inspector, who will create a special pest report on the property (unless the seller has already commissioned one). Pest inspectors, unlike general inspectors, traditionally accept work on properties they've inspected, so they have every interest in finding problems.
The pest inspector will look for infestation by wood-boring insects such as termites and flying beetles, as well as evidence of dry rot and other fungal conditions.
Some general contractors are also licensed pest control inspectors, but will normally charge extra for doing double duty. Be sure you get a written report of all inspections.
Depending on the property and your personal sensitivities, you might want to arrange specialized inspections for hazards from floods, earthquakes, and other natural disasters. The same goes for environmental health hazards such as mold, asbestos, and lead. If the garden area is important to you, or has features beyond the general inspector's expertise such as a pond or fountain, you might also need a separate landscape inspector.
And, if the general inspection revealed problems with the roof, foundation, or other areas that are hard to access or potentially expensive to repair, you might also want to hire a specialized inspector.
If the inspection reports show that the house is in good shape, you can proceed with the purchase, knowing that you're getting what you paid for.
If the inspections bring problems to light, such as an antiquated plumbing system or major termite damage, you can negotiate to have the seller pay for necessary repairs or to lower the purchase price. Or, you can back out of the deal, assuming your contract is written to allow you to do so.
To learn how to include an inspection contingency in your real estate purchase contract, see Contingencies to Include in Your House Purchase Contract.
For detailed information on all aspects of house buying, including more information on inspections and negotiations, get Nolo's Essential Guide to Buying Your First Home, by Ilona Bray and Ann O'Connell (Nolo).
]]>Maybe yes and maybe no. The standard home inspection does cover both the inside and outside of the home you'll be buying: its structure, systems, and physical components, such as the roof, plumbing, electrical and heating/cooling systems, floor surfaces, paint, windows and doors, and foundation. The inspector will look for pest infestations (termites, rodents, and other critters) as well as dry rot, mold, and similar damage.
A good inspector will also examine the land that the house sits on, for issues concerning soil grading, drainage, and retaining walls, and note issues concerning plants that affect the house, such as through root intrusion or falling branches.
That's a lot on the inspector's plate already. (And it's worth finding out where your inspector's particular strengths and weaknesses lie; almost all inspectors are stronger in some areas than in others.)
But even the best home inspection typically doesn't cover everything that you might care about with a house, nor everything that adds to its value.
If the house has extensive grounds, or landscaping in place; or if you're hoping to have it landscaped, and would like to know the limits and possibilities; you might want to hire a separate professional to evaluate issues relating to outdoor hardscape and structures, plants, soil quality, irrigation system, and other aspects of the landscape.
While no official "landscape inspector" profession exists yet, this term is being used more and more to describe a landscape professional who will, for a fee, examine a piece of land and prepare an evaluation. A thorough landscape inspection should include:
Don't be put off by the fact that the standard purchase contract has no box to check for a "landscape inspection." As with any other aspect of buying a house, you can ask to include conditions, referred to as "contingencies," to your closing the sale. If you'd like to make the deal contingent on being satisfied with the results of a landscape inspection, you can certainly ask.
If your real estate agent can't recommend someone for this job, do an online search for "landscape inspection" and the name of your town. Be sure to research the inspector's background, check personal references, and ask exactly what will be included in the inspection.
For detailed information on all aspects of house buying, including more information on inspections and negotiations, get Nolo's Essential Guide to Buying Your First Home, by Ilona Bray, Ann O'Connell, and Marcia Stewart (Nolo).
]]>Every state in the U.S. has its own set of real estate laws. For the most part, a real estate agent's help is not legally required, though agents can help you with tasks that border on legal ones, such as preparing a home purchase contract.
It's a different matter with lawyers. In a few states, such as New York and Massachusetts, only a lawyer is allowed to prepare the home purchase documents, perform a title search, and/or close the deal. That leaves plenty of tasks for the real estate agent to handle, but there will be a certain amount of teamwork involved. Any real estate agent can tell you what's customary in your state.
The process of buying a house is complex, and most people find it's easiest to get through with an agent by their side. Paperwork will be flying around like a small tornado. Other parts of the transaction will be happening quickly too—hiring inspectors, negotiating over who pays for needed repairs, keeping up good relations with the sellers (through their agent), and more.
All of this is second nature to an experienced real estate agent. What's more, experienced agents usually have contacts with good inspectors, mortgage loan officers or brokers, and others who can make your buying process easier. And they know what's considered appropriate behavior and practice in your geographical area.
One of the best reasons to hire a real estate agent is that the home sellers are likely to use their own agent—and you want to keep that agent from taking over or unduly influencing the process.
In fact, the seller's agent might try persuading you to let them represent both seller and buyer, in a "dual agency" relationship that primarily benefits the seller. (The less scrupulous sellers' agents don't make it clear that they're working for both people, but if only one agent is involved in your transaction, it's fair to assume that the agent's loyalties are with the seller.) It's better to have your own agent—or, some experts assert, no agent at all—than to settle for dual agency.
You're the only one who really knows what you want in a house. Even if your real estate agent is scouting out homes for you, there's a lot to be said for scanning the listings and, if possible, attending open houses yourself.
You might even discover that your agent doesn't understand your needs as well as you thought, or won't take you to see "FSBO" (for sale by owner) listings despite your stated interest in them, in which case you'll definitely want to be proactive during this process.
Even if you use a real estate agent and/or a lawyer, it's wise to learn as much as you can about the home-buying process. For example, researching the market value of comparable homes in the area will protect you against over-aggressive agents who might urge you to bid high in your offer for a particular house. Also, you'll prevent misunderstandings and reduce the stress of being told to "sign here" if you study the contents of the various real estate documents in advance.
Except in states where it's mandated, an ordinary real estate transaction doesn't require an attorney's help. These transactions are so standardized that most people in your state will use the exact same purchase contract (usually prepared by the state real estate agent's association), just filling in a few blanks.
However, legal issues might arise that a real estate agent can't answer. In that case, you'll need an attorney's help. Although good agents know a lot about the negotiating and contracting part of the process, they can't make judgments on legal questions.
For example, what if your prospective new home has an illegal in-law unit with an existing tenant whom you want to evict in order to rent the place to a friend? Only a lawyer can say with any certainty whether your plans are feasible. Or what if you’d like to rent the home for an extended period, such as a year, before you’re obligated to buy it? That will require drawing up an unusual lease. Or, if you're drafting any non-standard language for the purchase contract, or are concerned about some language in your mortgage, you might want to have an attorney look the documents over.
For information on finding and choosing an attorney, see How to Find an Excellent Lawyer.
Real estate agents normally work on commission, not salary. They receive their slice only after your home search is over, the contract negotiated, and the transaction complete. (In many cases, they end up doing a lot of work for nothing, perhaps because the buyers lose interest or can't close the deal.)
The seller typically pays the commission to both the seller's agent and buyer's agent—traditionally around 5% to 6% of the sales price, to be split between the two agents (sometimes evenly, sometimes favoring the seller's agent, who does most of the work).
This percentage isn't cast in stone, however. For example, the seller might negotiate the overall percentage down if the house is particularly expensive. (And in probate sales, the court sets the commission.) Some buyers' agents have been known to offer the buyer a percentage of their commission at closing.
Variations on the typical commission arrangement also exist. For example, some buyers prefer to hire an agent and pay the commission themselves, figuring it will make the agent more loyal to the buyer's interests, and provide grounds for a drop in the sales price. Less commonly, you might find an agent willing to perform limited tasks for an hourly fee rather than a full commission (in which case you'd also want to ask the seller to bring down the sales price accordingly).
A final but important issue is that consumer discontentment with the traditional model has led to lawsuits against real estate industry leaders, most notably the National Association of Realtors. As of 2023 these haven't led to any final court judgments, with settlements reached out of court, and appeals ongoing. Whether or not a final judgment forces the industry to alter its current commission model, however, the publicity this issue is receiving might lead to change.
Attorneys normally charge by the hour, at rates ranging from $150 to $500 or more. You might also find attorneys who charge flat fees for specific services, such as preparing real estate closing documents.
Although many attorneys prefer handling the entire case with a "blank check" regarding hours to be spent and tasks to be accomplished, you're hiring the attorney, and you can call the shots. If you prefer to hire an attorney for only a limited number of hours, or for specific tasks, such as answering a legal question or reviewing a document, you can negotiate this (and should record your agreement in writing).
To learn more about working with real estate agents and attorneys to bring about a smooth, affordable house purchase, see Nolo's Essential Guide to Buying Your First Home, by Ilona Bray and Ann O'Connell.
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