Sunday, August 05, 2007

Buying a house -- lessons learned

We tried to buy a house without using a buyer's agent. We got the house, but ended up with a agent. Here are our lessons learned about the transaction itself:
  1. Watch the language. The legal language is different, and more accurate, than the language used by the agents themselves. The "seller's agent" is legally called the listing agent, and the "buyer's agent" is legally called the selling agent. If you are buying a house, this is supposed to clue you in that "your" agent is really not acting in your interests.
  2. Extract more money from the mortgage broker. The mortgage broker gets a huge kickback from the bank: 1.5% in our case. We had multiple mortgage brokers find us loans, and we told the ones that were more expensive to come up with a better offer. What we did not realize is the size of their kickbacks. We could have asked, for instance, for 1% of the loan amount to be paid back to us at closing by the mortgage broker. We also talked directly to banks, and were unable to get a better loan than what we got through a broker. This seems like stupid behavior on the part of the banks.
  3. It's hard to avoid a selling agent. We found our own house, and told the listing agent that we did not want to use a selling agent. We figured we could save the 3% that the selling agent usually charges.
    1. The listing agent reacted very negatively (as did everyone else in the real estate business to whom we suggested this idea) when she heard this. She said her sellers would not give us a fair hearing unless we had an agent. She had no sensible explanation why. I finally phoned the seller at home, and left a message saying I wanted to hear directly from him that he wanted us to have an agent. What I got was a vague message back from the listing agent hinting that we needed a selling agent. We really liked the house; I caved in. I suspect but don't know that if I had used the "listing/selling agent" terminology instead of "seller's and buyer's broker" terminology, I might have broken through.
    2. We used Todd Beardsley as a selling agent. We found him in a posting at Mike's Lookout (Mike also used Todd). Todd charges 1% and rebates whatever extra the sellers are offering (typical selling agent commissions are 2.5% to 3%). He doesn't help you find the house, he just helps the negotiation. It worked, the listing agent accepted him immediately. I thought Todd was very professional, and would recommend him with one caveat: Like all selling agents, Todd is incented to (a) get you to buy the house, and (b) get you to pay as much as possible. He is a professional, but the incentive leaks through. For instance, as an opening strategy, Todd suggested that we figure out the maximum amount of money we would be willing to pay for the house, and offer that. No way!
    3. A few years ago, we bought a plot of land without a selling agent. In that case, there were no competing bids and the sellers were motivated (the land had been dropping in value and they had been trying to sell it for two years). The way it worked was that the listing agent pretended to represent both buyer and seller, and changed his fees to the seller from 6% down to 3%. The Mike's Lookout post above suggests that it's unusual for the listing agent to renegotiate his commission like this. I don't think so. Another real estate agent that we have worked with has told us that the commissions get renegotiated all the time, for instance when selling agents are trying to close the last 1% of so between the buyer and seller.
  4. Never counter-offer all of your bidders. When you counter-offer your highest bidder, you are rejecting their bid, placing the bird in hand back in the bush. In our case, I'm pretty sure we were the highest opening bidder of three. One other was a low-ball or nonserious bid. The sellers counter-offered all of us, basically trying to rachet us up. What they managed to do, instead, was tell me that I was the highest bidder. When I lowered my bid, they countered with my original bid, which told me the other bidder hadn't matched my lower bid. I should have gone lower still. Instead, I caved. Even so, the counter-offering everyone strategy resulted in us paying less.
  5. Pay the selling agent directly, instead of allowing the listing agent to do it. In our case, Todd was able to negotiate this with the listing agent during escrow. It's worth a lot to the buyers, since they pay property tax on the amount paid to the agents for as long as they own the house. But it's also worth money to the sellers: they save transfer tax, and perhaps a few other items.
  6. Try to pay the listing agent directly, instead of allowing the seller to do it. We didn't try this, because we couldn't figure out how to do it. You might phrase your offer as an amount for the house and a fixed amount for the listing agent. That way, the listing agent and seller can renegotiate their terms without involving you, and it doesn't appear that you are incenting the agent to sway his client, to whom he owes a theoretical professional obligation.