Am I required to have a realtor to buy a house? How do I buy a house without a realtor? These are two common questions these days, primarily due to more “For Sale by Owner” transactions, also referred to as “FSBO”.
Some homeowners believe that if they sell their home themselves, without a realtor, then they will save money by not having to pay realtor commission fees. In a standard real estate purchase, there are typically two different realtors, a buyer’s agent and a seller’s agent. The combined real estate agent commission fees are usually 6% (3% for the buyer’s agent and 3% for the seller’s agent).
In scenarios where a homeowner wants to sell their home for $450,000, with a 6% commission fee, they would pay a total commission of $27,000 to the agents.
While $27,000 is a bit more than pocket change, there comes a lot of resources and experience with this fee. Before we dive into those details however, let’s address the original questions.
In a FSBO transaction, the homeowner (seller) may not be willing to entertain allowing you (the buyer) to have a real estate agent represent you because they don’t want to pay the commission fee.
While this is allowed, it can be risky to engage with a legally binding real estate purchase agreement without having a real estate professional guide the seller and the buyer through the process. It is not a requirement to have a realtor to purchase a home. Be careful though. Buying real estate without having an experienced professional could cost you more in the long-term than the initial commission fee if not completed carefully.
For the sake of this article, we will focus on the buyer’s side of the home purchase transaction. As the buyer, you have the option to have a realtor represent you, whether the seller prefers it or not. Be careful not to feel pressured into representing yourself; especially if you have no experience buying real estate.
If the seller threatens to not accept your offer if you have an agent, then you may want to figure out why. If it’s because of realtor commission fees, try negotiating a fee with your agent, i.e. 2% or 3% commission. Once you’ve come to an agreement with your agent, then make an offer to the seller of an agreed upon purchase price plus the 2% or 3%. This way, the purchase price will cover the seller’s original asking price as well as the commission fee. In this scenario, as long as the home appraises for the total purchase price, then everyone wins.
Another reason why a seller may not want any realtors involved could be due to the condition of the home, which should be a large red flag and you should run.
While it may seem like a cost savings to purchase real estate without an agent, learning the hard way could prove to be an expensive lesson. A buyer’s agent only gets paid when the deal closes and the money transfers hands at the title company. So they are going to be motivated to help ensure that the deal closes, on-time, and with as little risk to you, the buyer, as possible. Here are just a few items that your buyer’s agent will be focused on to represent you:
Negotiation of terms [Purchase price, review of seller’s disclosure, closing costs (who’s paying), closing date]
Ensuring that earnest deposit is provided to title [Some FSBO transactions result in the buyer giving the check to the seller (risky)]
Referring reputable title company
Accurate title search is imperative; especially if you waive owner’s title insurance
Referring reputable home inspection company [While home inspections aren’t required, they are worth the money most of the time]
Serving as liaison to ensure everything is covered with:
The lender
The appraiser
The listing agent
The homeowner’s insurance company
Pest inspection company (if required)
Home inspection company
Local health department (if well water requires testing)
Local health department (if septic tank or lagoon requires inspection)
Local contractors (if the home needs repairs, i.e. new roof, paint, carpet, etc…)
The list goes on with the myriad of tasks that a motivated real estate agent will manage for you during the process. Without having someone who is solely looking out for your best interest in a real estate purchase transaction, many things can and usually do go wrong.
A few examples:
If you negotiate too high of a purchase price and the home does not appraise for the agreed upon purchase price, your earnest deposit could be at risk. At this point, you could lose your deposit as well as any other expenses that you may have incurred up to that point such as inspection fees and appraisal fees.
If there is a private road to the home and a private road agreement is required for loan approval, an experienced agent would know to verify if one exists during contract negotiations.
If you don’t find out about this until later in loan processing, the loan application could be denied if a qualifying private road agreement isn’t available and again, you may lose your earnest deposit as well as any other fees that you had paid for at that point, i.e. inspection, appraisal, etc…
If flood insurance is required, an additional flood insurance policy premium could be as high as the standard homeowner’s policy, which will increase your monthly payment and could cause your debt to income (DTI) ratio to exceed allowable limits and cause your loan to be denied and again, you may lose your earnest deposit as well as any other fees that you had paid for at that point, i.e. inspection, appraisal, etc… An experienced real estate agent will verify if flood insurance is required during negotiation.
If you’re purchasing a condominium with a VA loan or an FHA loan, the condo must be on the VA or FHA approved condo list. If not, the loan cannot be approved.
If you’re purchasing a home in most areas using a VA loan, a clear pest inspection is required. An experienced agent will ensure that this inspection is completed and verified clear of “wood destroying organisms” (WDO).
The list of examples of items that an experienced real estate agent looks for when representing a buyer continues and can be different from one property to the next. When weighing the cost of having a professional represent you in a real estate purchase transaction, it’s important to understand the benefit that comes along with that cost.
Once you realize that the benefit will almost always exceed the cost when working with a reputable real estate agent and lender team, you will realize that it’s an investment. Unless you’re an industry professional or have bought and sold multiple properties on your own recently, it may be worth considering the opportunity to leverage the expertise of a solid agent in your area. If they’re experienced, motivated, and reputable, you will not be disappointed.
Ready to speak with an agent? Contact me.
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Terry Roberts, USMC Veteran | Sr. Loan Officer NMLS 397987 | E Mortgage Capital
Terry Roberts is a U.S. Marine Corps Veteran and specializes in residential mortgages, including new construction, conventional, FHA, and VA home loans. He has helped more than 10,000 clients start the home buying process across America.
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