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.


  1. That was a nice and insightful post.

    Here's an interesting question though, how do you handle the timing between different offers you are making on houses/land as a buyer?

    Ditto for sellers...


  2. I'm not clear. Are you asking, if you are a buyer looking at multiple properties simultaneously, how do you time your offers on all of them?

    The usual model, as near as I can tell, is that buyers identify one house/property at a time that they want to buy, then they try to buy it. It would be great to have two, since you could drive a harder bargain, but we weren't that fortunate. We tried like heck to find another place, all to no avail. So I haven't done your scenario, and no have no experience to report.

    When we sold our old house, we had multiple bidders. We counteroffered the second-highest bidder, eventually getting them higher than the highest initial bid. At that point, I wanted to counteroffer the highest bidder, but our listing agent talked me out of it. Her reasoning was that

    (a) if the now-highest deal fell through for some reason, we wouldn't want to have pissed off the other bidder. This seemed weak to me at the time; I thought there was a very small chance of the deal falling through, as there were no contingencies.

    (b) she was concerned about the timing. The middle folks had given us just a few hours with their counter-counter-offer, so we would have had to put a very short time limit on a counter to bidder C. During that time, we couldn't legally accept the bidder B offer, because C could have accepted and then we would owe the house to two parties. So, legally, there would be this little window between when our counteroffer to C expired, and B's counter-counter-offer expired, when we could accept B's offer. She didn't like that because she was concerned that the time limit would reduce the amount of back-and-forth we could do to get the price up.

    This brings up yet another weakness of counteroffering multiple parties. A counteroffer to one party says "I will sell you this house for this much" -- it's the first time you are legally obligating yourself (the MLS listing price doesn't mean squat). A counteroffer to multiple parties is more squishy: "I will sell you this house for this much, unless someone else offers more in this time frame".

    In the end, I was happy with the price that we negotiated. Perhaps that suggests I didn't try hard enough. But I think there is something else going on: there is a huge advantage to knowing what you want and how much it's worth to you, in dollars. We had been designing a house for three years when we bought this one, and that experience taught us a lot about evaluating a place, so that we were able to do that quickly. We were able to bid and negotiate quickly, and I think that enabled us to blow past folks who weren't as sure as we were, but who might have paid more (or sold for less) if given enough time to think about it.

  3. In defense of Ian's statement "Todd suggested that we figure out the maximum amount of money we would be willing to pay for the house, and offer that."
    In multiple offer situations I tell this to all my buyers because in most multiple offer situations you only get one chance to bid so it makes sense to offer the most you feel you can. As you can see from Ian's story, the listing agent foolishly tried to counter everyone and it backfired on her. Savvy agents do not counter all bidders in multiple offer situations. They pick the most attractive (highest price, best terms) and tell the others "thank you for your time". When you only have one shot, it needs to be your best shot!

  4. Every deal is unique. Depending on the market (buyers' vs sellers'), how long the house has been on the market, mutliple offers, etc., you might use one of many negotiating strategies. What is clear to me, though, is that you don't understand the listing contract between seller and listing agent, nor do you understand the agreement all agents have with the local MLS. In adddition, agency law expressly forbids the selling agent/buyer's agent from not working in your best interest to the best of his ability.

  5. Anonymous,

    What definitive thing have you actually said?

    As I said, when I've talked to folks in the real-estate industry about my understanding of the business, nearly all react strongly negatively, as you have. I smell fear. I remember hearing the same sort of thing from bond traders who saw that computerized bond clearing would eventually out compete human-mediated clearing. Nobody likes to see their job go away.

    Last year, the average house in the U.S. sold for $320,000. 3% of that is $9600. Half that goes to the agency, so to make a decent living after expenses, a real estate agent would have to buy/sell 12-16 houses a year. This is doable. 3% commissions in most of the U.S. markets make sense.

    Now let's consider houses costing $2.5M. 2.5% of that is $62k, and once again half goes to the agency. Sell just four a year and you are making a decent income. In 2004-2007, agents were probably selling more like 6 to 12 a year, which is a yearly income around $300k or more. Yes it's been a wonderful time to be a high-end real estate broker. Their incomes are kept high because brokers have managed to avoid competing by offering lower commissions. I think they may have had problems with having too many agents (not enough deals per agent), but that's supply and demand, a consequence of having inflated commissions.

    If commissions on $2.5M houses were 1%, you wouldn't find folks like me so interested in figuring out how to spend less. I think that's where things are heading, and I don't think real estate brokers like that at all, hence all the negative reaction.

    As for the "agency law", the law also says that the CEO of a company is supposed to work for the best fiducial interests of the shareholders. Look how well that works. Not.

    Since I've read and signed contracts between myself and my own listing agent for other properties, I have a pretty reasonable idea of what's in there. I know that these contracts usually start out as boilerplate. You've made a somewhat vague claim: what part of that boilerplate do you think I'm misunderstanding? If you think that the contract somehow prevents the buyer from paying the listing agent directly, because of the provision that says the seller will pay the listing agent, then you may be forgetting that any contract can be amended so long as both parties agree. If the buyer suggests paying the listing agent directly, so long as the seller and listing agent both agree, it's fine. Since both have an incentive (seller: lower transfer tax, listing agent: get the deal done), it can be done.

    You are quite right that I don't know the details of the agreement agents have with MLS. But I am certain that there is no obligation to sell the house at the price listed, which makes the price nothing more than a suggestion.

    There is no such thing as a buyer's agent. That is a phrase used by laypeople, but not in law. I would not be surprised to hear that the usage of the phrase originated with brokers looking to placate nervous buyers.