What Is A Discount Broker?

Some sellers, willing to perform part of the brokerage work themselves, list their Property with discount brokers, who offer a seller limited services for a reduced commission. You need to understand this relationship because if you run into one, you as a buyer will also be expected to do part of the work by yourself. Most often, the broker saves time by making appointments but sending you to view houses on your own. You may be offered less help with mortgage financing. Because discount brokers usually belong to a multiple listing system, however, you can probably view their listed homes through other brokers, who can provide you with more service if that is what you want.

Now that you’ve mastered the duties of buyers’ and sellers’ agents, it’s time to find out whether your state also provides for transaction brokers, dual agents, facilitators, and whatever.

A facilitator, or transaction broker, usually represents neither party to the sale. Instead of fiduciary duties, the broker or sales lerson simply offers expertise and negotiates between the par ties. The law, in states that provides for this status, usually requires simply honest and straightforward dealing, but may set up vary ing other duties as well. You would want to ask if confidences are kept and just what the agentís duties would be.

In some states, a dual agent is allowed to represent both par ties, with no duty of confidentiality or notice. The role is a delicate one, for itís impossible to provide first loyalty to both buyer and seller.

Sellers who handle their own property are known as FSBOs (fizz-bo, For Sale By Owner). You are more likely to meet them today than you would have been a decade ago. Perhaps one house in ten was sold directly by the owner in 1990; the figure is approaching 20 percent today. Some do it for the satisfaction of tackling an unaccustomed job, but they’re not doing it just to pass on the saved commission to you. They usually plan to sell at fair market value and pocket the commission as extra profit in return for their efforts.

You will have extra work when you buy directly from an owner. Unless you retain your own broker, you’ll have to negotiate face to face, seek extra attorney input into the written contract, explore financing options on your own, and ride herd on your own mortgage application process. It may be extra important to have your own building inspector look the property over before you commit to buying.

There are two situations in which you might want to deal directly with a FSBO:

1. The property is unique, and you feel strongly attracted to it.

2. The place has been underpriced by a FSBO who chose to do without the services of an appraiser as well. In that sit uation, be prepared to act promptly; some investors lie in wait for unwary FSBOs and jump as soon as underpriced property hits the market.

It is generally a waste of energy to start your house hunting with FSBOs. Until you have a good grasp of prices in the area and the entire homebuying process, it’s difficult to deal with home owners who often have an exaggerated idea of a home’s value and who don’t know how to proceed. Wait until you, at least, know what you’re doing.

Should You Get Your Own Broker?

What’s to stop you from retaining your own broker, someone obligated to put your interests first and legally bound to help you obtain the property at the lowest possible price? Nothing. Almost unheard of in years past, brokers who represent buy ers are now found in every real estate market, and you should have no trouble locating one.

When you have specifically engaged a buyer’s broker, those fiduciary duties are now owed to you, and sellers become merely customers. Your agent must keep your information confidential and obey your orders, such as If they don’t accept our offer, give them one for $5,000 more. The buyer’s broker is duty-bound to tell you anything that would be useful to you (I’m not sure, but I’ve heard the seller needs a fast deal) and to help you obtain the property for the lowest price.

The buyer’s broker may ask for a nominal retainer to compen sate for time invested; sometimes the retainer applies against eventual commission due or even against the purchase price of the property bought. If no property is bought within the con tracted time, the retainer may be forfeited.

Occasionally, the buyer pays the usual share (perhaps hail) of the commission that the seller originally promised to pay to a selling broker. In return, the seller may reduce the sale price by that amount, because the seller will be paying only half a full commis sion to the listing broker.

In theory, the buyer who specifically hires a broker should pay for the service. In real life, though, it usually works out that the seller pays the originally agreed-upon commission, part of which goes to the buyerís broker.

Why would the seller be willing to do that?

Buyers, first-timers especially, don’t have much spare cash lying around when the sale closes. Just to make the deal work, sell ers are often willing to furnish the commission in that fashion.

Proponents of the system like it because it sets up an adver sarial situation similar to that in which the parties retain two different attorneys. Sellers and buyers each have a broker clearly working for them alone, without the conflicts of interest that arise under the more traditional system.

If you hire your own broker, you can expect to sign a contract in which you promise that during a specified period of time you will not house hunt with anyone else, and that if you buy any prop erty within that time in any fashion, your broker will be entitled to a fee. A typical buyer’s broker contract is shown in Figure 2.1.

The system can work well unless you find yourself tied to an agent who does not, in the end, suit your needs. But it’s well to remember that the old-fashioned method, in which you would deal entirely with sellers brokers, has been around for years, and can also bring satisfactory results.

The Agent’s Interest

If the agent is duty-bound to put the seller’s interest first (and there’s only one first place), how should this affect your relation ship with the broker?

First, realize that no confidentiality is owed to you. It’s practi cal to reveal your financial situation if you expect to get effective service, but you may want to keep some information to yourself. The broker who knows that you would pay more ìif we have to is, strictly speaking, obliged to convey that information to the seller. Saying but don’t tell the seller that won’t help because the agent does not have any special obligation of obedience to you. Never reveal the highest price you are willing to pay to a seller’s agent. Assume that whatever you say will be (or at least should be) transmitted to the seller.

Take advantage of the fact that you must receive honest answers to your questions. In a few states you are entitled to a seller’s written disclosure of defects, but elsewhere, Are you aware of any defects in this house? Is a good all-purpose query to ask of both seller and broker, preferably in front of witnesses.

In dealing with a seller’s agent: Do not reveal the highest price you are willing to pay on a particular property. Do ask whether the seller or agent knows of any defects in the property.

What’s to stop you from retaining your own broker, someone obligated to put your interests first and legally bound to help you obtain the property at the lowest possible price? Nothing.

Almost unheard of in years past, brokers who represent buy ers are now found in every real estate market, and you should have no trouble locating one.

When you have specifically engaged a buyer’s broker, those fiduciary duties are now owed to you, and sellers become merely customers. Your agent must keep your information confidential and obey your orders, such as If they don’t accept our offer, give them one for $5,000 more. The buyer’s broker is duty-bound to tell you anything that would be useful to you (I’m not sure, but I’ve heard the seller needs a fast deal) and to help you obtain the property for the lowest price.

How the Law Can Effect Your Buying

The Law of Agency clearly sets out the broker’s duties to the principal (also known as the client), the one who retains and (usually) pays the agent. These fiduciary duties are complex, but they boil down to one thing: The agent must put the principal’s interest first, above anyone else’s, including the agent’s own interest. Among the specific duties involved are the following:

Obedience to the principal’s instructions unless they are illegal. (Examples of instructions an agent would not obey: Don’t show the house to any Lithuanians. Keep quiet about the broken furnace, or new thermostat wiring.)

Loyalty to the principal, which strictly interpreted (it sometimes isn’t) includes obtaining the highest possible price for the property and never suggesting any offer under the listed price.

Confidentiality, which prohibits the seller’s agent from sharing with you details of the seller’s financial or family situation, unless of course the seller has authorized such action to encourage offers. Whether the seller has received previous offers, and for how much, is also confidential information.

Notice, a duty that obliges the seller’s agent to forward to the principal (seller) any fact that it would be in the sellerís interest to know, whether or not the seller knows enough to inquire. This one is of vital importance for you to understand.

Unless you specifically hire your own buyer’s broker to repre sent you (more on that later), none of these duties is owed to you. Yes, you say, I know those are the duties of the listing agent. But I’m dealing with a different firm that cooperates through the multiple listing system. My broker is the selling agent, and that’s different.

No, it isn’t. Both firms are agents for the seller. The second one, the one you’re working with (let’s not say your agent) is cooperating with the first firm and the seller. You are merely a third party in that relationship, a customer rather than a client.

It can be scary to realize this, but things arenít as bad as they seem.

First, the law does require the broker to be honest, straight forward, and trustworthy with third parties. Your questions will receive honest answers, although sometimes an honest answer might be, I am not allowed to tell you whether the seller is facing foreclosure; I must keep financial information confidential.

Besides answering your questions honestly, agents and sellers have an obligation to volunteer information about any serious (material) hidden defects you aren’t able to see for yourself. This is where the furnace or thermostat comes into play. State laws differ, though, on whether they must also tell you about past problems that donít technically affect the real estate, such as sui cide or murder on the premises, illness of the seller, and the like.

Second, you will receive a great deal of service (see list in the next chapter) paid for by the seller, because without this service to buyers, the property might never be sold.

And finally, you can take heart from the fact that, as a practical matter, many seller’s brokers end up violating their duty to the seller. A good agent empathizes with you, wants you to find what you want at a price you can afford, and may emotionally adopt you. If brokers didn’t to some extent identify with the buyer, not much real estate would get sold!

Prepare Before You Buy

To prepare for your purchase, start reading classified ads in the real estate section of your newspaper and visit open houses on the weekends all this even though you’re not ready to buy yet. If you’re a veteran, send for your VA certificate of entitlement, just in case you end up wanting a VA mortgage. Contact a credit bureau and request an inexpensive report on yourself, just to make sure that no mistakes will turn up. Sock away extra cash; you’ll be motivated to skip a vacation or a movie when you have a short-term goal like accumulating money for a down payment and closing costs. Don’t buy anything on credit. This is not the time to take on another car payment, buy a boat, or even apply for an additional credit card. If someone is making you a large cash gift toward your purchase, try to get it into your own savings ac count months before you apply for a mortgage loan.

Association, or Board, of REALTORS, a state board of REALTORS and the National Association of REALTORS. REALTORS subscribe to a code of ethics that goes beyond state license law and usually sponsor a local multiple listing system, which offers access to houses listed for sale by many different firms.

REALTORASSOIATE is the term used by some boards of REALTORS for salespersons associated with member brokers. So as you start your search for the best agent, should you pre fer a salesperson or a broker? There’s something to be said for each. In general, you can expect a broker to have had more education and experience. On the other hand, some long-time sales- persons remain at that status simply because they prefer not to go into business for themselves. And you could run into a well- trained, highly motivated newcomer with the time and enthusiasm to do a first-class job for you.

So you think you’re looking for your broker! In recent years, a Federal Trade Commission study found that most buyers believed the agent who helped them buy a house was their agent, putting their interests first. Many sellers also thought so, and, regrettably, so did many brokers.

A Growing Market?

Not since the 1930s have real estate prices varied so much from one area to another as they do now. At any given time, one ich as part of the country sees rising values while another is hit by unfa upied variable economic factors. The real estate market is cyclical: A drop in prices eventually attracts new industries and turns into recovery. At one point the farm states are badly hit, but prices are skyrocketing on the East and West coasts; then the Midwest sees steady growth and increase in values while the coasts experience some what stock analysts would call a correction.

Overall, the United States experiences gradual growth in real tate estate prices every year, at least matching general inflation. Many experts believe that the major problems affecting certain areas factors such as unemployment, drought, fluctuations in farm prices or the price of oil have already been discounted, with the severe drops behind us. And in hard-hit areas, it’s great to be a buyer. Itís like buying stock when the market has bottomed out; recovery is almost certain.There are better and worse times to sell oneís home, but it’s almost always a good time to buy.

Young people’s first attempts at house hunting often trigger bewildering and misguided advice from parents and grandpar ents who remember what things used to be like.You must not be looking carefully. Some broker’s taking you for a ride. Why, we only paid $9,500 for this house, right after your father came back from the war, says a mother stunned by the prices her son reports in a Sunday phone call.

Somebody’s telling you all wrong, saying you should buy with such a small down payment. You tell that husband of yours to wait a few years until youíve saved up some more money, says a grandparent with painful memories of the Great Depression. The solid old-fashioned virtues of denial and thrift, however, no longer reward the homebuyer. The old traditions have some drawbacks. For young people in some areas, the house they want to buy keeps going up in price faster than they can accumulate a larger down payment. Meanwhile, they lose out in tax benefits, and their rent is probably raised too.

If you can’t find your dream house or can’t afford it today, your best bet is to buy whatever you can, as soon as you can, how ever you can. Then start building your savings. When you finally locate the perfect house, you’ll have something to trade in on the deal: a house in the same market area thatís kept pace with what ever is happening in real estate values.

Get Away From That Mortgage Payment

This calculation arbitrarily assumes that 10 per cent of your mythical mortgage payment would cover homeownerís insurance and principal repay ment, with the rest going for deductible interest and property taxes. It also assumes your top tax bracket (known to accountants as your marginai tax rate) is 28 percent. If your tax bracket is higher, your tax sav ings will be correspondingly higher.

A. Your present rent
B. Multiply by 1.32
C. Equivalent monthly mortgage payment

The result (line C) is a rough estimate of the amount you could spend for monthly mortgage pay ment (principal, interest, property taxes, and home owners insurance) without being out any more money at the end of the income tax year than you are with your present rental.

Besides the tax saving, in most areas you can expect some increase in the value of your home: an additional return on your investment, known as equity buildup. There is also a growing market for eco renovations that save cash. Price trends in real estate vary with locality; brokers can estimate what might happen in your area over the next few years.

Equity represents the amount you’d have if you sold your home and paid off the liens (financial claims) against itóusually the mortgage. If you buy a $120,000 house with $25,000 down and a $95,000 mortgage, your equity the day after you move in is $25,000. Equity is the money you have invested in the house it’s like money in the bank.

If the house goes up in value by 5 percent in the next year, and your debt is paid down amortized) by a paltry $1,900 that first year, your equity has grown to $32,900 (market value, $126,000, less remaining debt, $93,100).

Equity buildup assumes, of course, that the value of real estate rises. Can you count on prices rising in your area?

Getting The Finances Right

These days, home ownership offers one of the few remaining tax shelters. Property taxes on one’s home and even on vacation property are completely deductible. Interest paid on up to $1 mil lion in loans to acquire or improve a home (or two homes) is deductible and that more than covers most of us. If the value of oneís property rises over the years, additional borrowing of tip to $100,000 in equity loans, refinancing, or second mortgages also qualifies for federal tax deduction.

For homeowners in a 28 percent tax bracket, this means that Uncle Sam is making almost 28 percent of their monthly payment, with deductible property taxes and interest forming almost the whole of the payment in the first few years of the loan. Unless contribution shows up in the form of lower income tax owed or unexpected income tax refunds. Using the formula in Figure 1.1 will give you a rough idea of how much you could afford to spend on monthly mortgage payments. The calculation does not include further possible savings on state income taxes.

Exclusion

When you sell your home, you can take advantage of a delight ful law that allows tip to $500,000 profit for joint filers ($250,000 for a single homeowner) free of any federal income tax ever. The exclusion from capital gains tax, which went into effect for sales after May 7, 1997, can even cover previous, postponed tax on ear lier home sales under the more complex laws in effect before that date.

This free lunch on the IRS is available to homesellers of any age, and you can do this more than once in your lifetime theoretically as often as every two years. (There is even an exception to the two-year limit, if a quick move is needed because of a job change or illness.)

You must have owned and occupied the property as your main home for at least two of the five years before the sale. If only one spouse is the owner, the couple is still entitled to as much as $500,000 tax-free profit on the sale, but both must have occupied the property for the required two years.

My Two Cents

Surveys by the U.S. League of Savings Institutions and the National Association of REALTORS have documented the trends of the 1990s. Only 44 percent of homehuying households are made up of married couples with dependents. Unmarried couples, with or without dependents, now form a measurable segment of the homebuying population. As the 21st century approaches, older homebuyers make up an increasing share of the market, affecting the design of new housing and creating “trickle-down” opportuni ties for younger homebuyers in the form of the larger homes they leave behind. Real estate finance has also changed. Where Grandpa was offered a simple mortgage at a standard, fixed interest rate, today’s buyer can choose among hundreds of innovative plans, each designed to meet some borrowerís particular financial needs. The desire to retreat from the pressures of an increasingly crowded society, inflation, tax considerations, the need for self- expression: all enter into the decision to buy a home. When you own your own home you can play the stereo at midnight, keep a dog (keep two dogs!), plant a garden, drive nails into the walls wherever you want, and use your own washer and dryer. And the portion of your monthly mortgage payment that goes to reduce the principal debt acts as automatic, forced savings.

It takes just three things to buy a house: some cash, depend able income, and good credit. And if you’re lacking any of these three, no need to despair. Home ownership is still possible: there are techniques for overcoming each problem. Just be sure to level with the real estate agent you work with about your financial problems. A competent agent can recom mend appropriate financing strategy for your particular situation.