Topics: real estate
Somehow you’ve managed to sweet talk somebody into lending you the cash to buy your first home. But unless you’re a tiny tiny person, you can’t live in a mortgage pre-approval letter. So it’s time to find a property on which to spend all those promised funds. We’ve previously touched on methods you can use to find your new home, but you’re probably not quite sure how to go from “Ooh, that house looks nice” to “Ooh, I own this house.” Heck, you might not even know how to go about looking for your new home in the first place. Enter the real estate agent.
Thanks to this little thing we have called a “legal system,” it’s ridiculously complicated to buy a house. Did you know that purchasing a home involves so much paperwork that 17 acres of rainforest are chopped down every time someone makes an offer on a property? Well, that’s not true, but there’s still a lot of paperwork involved.
Luckily for you, there’s a whole profession full of people out there who have only one job–helping you spend tons of money on your brand new home. These people are called real estate agents, and you definitely want to get one of them to help make this whole homebuying thing a lot easier.
What’s a Real Estate Agent?
I’m glad you asked that question, gray-colored section headline. While technically anybody can act as your real estate agent, only specially licensed folks can actually get paid for doing the job. To get licensed, agents must sit through 40+ hours of classes and then receive a passing grade on the real estate exam for the state in which they wish to be licensed.
Unfortunately for real estate agents, obtaining a license is only half the battle. All newly minted agents must hire onto a brokerage firm. You may know of some brokerage firms already–Long and Foster, Century 21, RE/MAX, any many others. After some years of experience as an agent working for a brokerage firm, an agent can opt to take more classes and get a different license to start his or her own brokerage.
Both homebuyers and sellers can obtain the services of real estate agents and their brokerage firms. Chances are good that the people from whom you buy your home will have their own real estate agent–an agent whose sole fiduciary responsibility is to the sellers. While both the buyer’s and seller’s agent make more money if the property sells for more, the buyer’s agent is bound by law and ethics to look after your best interests, even if that means less money for them in the end.
Why Do I Need a Real Estate Agent?
The truth is that you don’t really need a real estate agent; that is, you are not legally required to have one in order to buy a home. That said, there is absolutely no reason not to have one. They save you a lot of work, and they can help navigate you through one of the most legally complex events of your life.
Here are some of the things for which a buyer’s real estate agent is generally responsible:
- Locating potential properties. Unless you’ve already found the house you want when you approach your agent, you’ll probably want some help sorting through all those listings. Your agent can help match you to properties with the features you want in a price range you can afford. And if you aren’t already pre-approved for a mortgage loan (though you should be if you’re following my tried and true process), your agent may be able to look at your finances and ballpark your price range.
- Chauffeuring and door opening. After finding potential properties for you, your agent will take you to see them. Quite often you’ll hop in the car with your agent and he or she will drive you to see the place. You’ll need a real estate agent here because only licensed agents can operate the property’s lockbox. The lockbox is attached to the house and holds a key to the property. Buyer’s agents can access the key with a secret code provided by the seller’s agents.
- Composing the contract. When you’re ready to make an offer on a property, you’ll sit down with your agent who will fill out roughly three billion pages of legal mumbo jumbo that simply say “Hey, I want your house and I’ll give you X dollars for it.” The contract itself is usually pretty boilerplate, but there are hundreds of blanks that your agent will fill in for you with your specific offer details.
- Recommending services. You may need the services of people such as house and termite inspectors or a settlement agency. You can find your own, ask friends for recommendations, or pick one from a list provided by your agent. Since there are laws prohibiting agents from being paid for referring you to these services, you can usually trust recommendations from your agent… assuming that house inspector isn’t your agent’s brother or something.
- Handling other paperwork and communications. Even after your offer is accepted, there are still plenty of things that need to be done. Your agent will communicate the details of the contract to your mortgage loan officer and settlement agency. They’ll also pass on any requested or required repairs to the sellers following a house inspection.
- Holding your hand at closing. Your agent will mostly be a spectator at closing, but they’ll be there to answer any questions you may have or help handle any items that may pop up at the last minute.
If you think you can handle all of that yourself, then by all means go right ahead. But as you’ll find out in the next section, you’re likely passing up a free helping hand.
How Do Real Estate Agents Get Paid?
You might be thinking, “I can save money by not using a real estate agent to help me purchase a home.” In most cases, you’d be absolutely wrong because it is the sellers who actually pay for the services of your agent along with their own. Here’s the rundown on how your agent and theirs get paid.
- Sellers find an agent. People who want to sell their house go to a brokerage firm and obtain the services of an agent. They draw up a contract specifying exactly how much money the buyer and seller agents will receive in total. Typically that amount is set at 5-6% of the selling price of the property. The buyer’s and sellers agent will generally split that amount, called their commission, 50-50.
- Seller’s agent does their thing. The seller’s agent puts the property up on the MLS and does their “best” to get the house sold. Really, a seller’s agent’s “best” is roughly equivalent to the size of their commission.
- Buyer’s agent sees the property, possibly shows it to potential buyers. Unless you scour the MLS listings or newspaper classifieds yourself, your buyer’s agent will help you find candidate houses. While buyer’s agents stand to make more money if you buy a more expensive house, they’re not going to show you homes you cannot actually afford since that would be a waste of their time. They may, however, steer you toward listings where the commission percentage is higher. In fact, some buyer’s agents may refuse to show properties to their clients if the commission is set too low.
- Buyers find a house they like and make an offer. And if the sellers accept the offer, we move on to the final step…
- At closing, everyone gets paid. We’ll go into obscene detail about closing near the end of this series, but an important aspect of closing (at least to the agents) is that the agents get paid. Whatever the final sale price of the property is, the agents get their percentage, usually from the sellers.
- The brokerage firms take their cuts. Your agent doesn’t get to pocket all of that cash. Their brokerage will take a hefty chunk from the agent. My agent once worked for a brokerage which took 50% of the commission, but that’s much higher than most firms usually take.
And while you might think you can make that 3% buyer’s agent commission by handling the whole process yourself, you’re probably out of luck there. Generally if you opt not to use a buyer’s agent, you won’t get a dime of the commission. Instead, it’ll either be forfeited or go to the seller’s agent along with their part of the commission. Note, however, that there are other ways for you to get a chunk of the buyer’s agent commission, but we’ll talk about that in a later part of episode #6.
In short, real estate agents usually don’t cost you anything as a buyer, they handle all the paperwork (except for your own signature; they don’t have power of attorney to do that for you), and they’re licensed and bonded and insured and legally accountable in case things gets screwed up during the purchase process. Something tells me you are neither bonded nor insured, and you certainly don’t want to be legally accountable for something as big as a house sale gone wrong.
What Are Realtors?
You may hear the term “realtor” used synonomously with “real estate agent.” The proper use of the term “REALTOR®” (all capital letters) refers to members of the National Association of Realtors (NAR). Don’t let the fancy name fool you; being a REALTOR is as simple as adhering to the NAR’s Code of Ethics and Standards of Practice and paying membership dues. Yes, that’s all there is to it.
In my research and talks with various people, I could find no advantage to going with a real estate agent who is a REALTOR versus one who is not. I’m not sure if our agent was a REALTOR, and I never even bothered to check. So don’t let some capital letters stand between you and a good real estate agent.
Speaking of which, next time we’ll talk about some strategies for locating a good real estate agent… as well as avoiding the bad ones.