Can an Agent Use Commission to Pay a Buyer's Closing Costs?

This question comes from the Tennessee Association of Realtors Hotline, where agents can ask questions regarding Tennessee real estate law :

QUESTION: Is it still allowable for a real estate agent to apply a portion of her percentage of commission to the purchase price for a buyer? If so, what is the proper way to word this in a contract?

ANSWER: NO, this is no longer permitted. We recently discussed this issue with the Tennessee Real Estate Commission, and they are of the opinion that the new statute regulating cash gifts, Tenn. Code Ann. 62-13-302(b) will NOT allow the paying of closing costs for their client. This new law states "A real estate licensee shall not give or pay cash rebates, cash gifts or cash prizes in conjunction with any real estate transaction. As part of the Tennessee Real Estate Commission's general rulemaking authority the commission may regulate the practices of real estate licensees in regard to gifts, prizes or rebates that are
not otherwise prohibited by law."

This is a change in the previous rules governing this type of activity. The Real Estate Commission is of the opinion that the paying of closing costs would amount to a cash gift. You can still offer to cut your commission, but this would require that the sales contract be amended in order to reflect that the price has been changed. For example, if you are offering to reduce your commission by $1,000.00, the sales contract would have to be amended demonstrating that the sales price has been reduced by $1,000.00.


To be clear, sellers are allowed to help with a buyer's closing costs, but usually only up to 3% on a conventional loan.

And please don't ask me to cut my commission. It makes me cranky.

Stigmatized Properties: Full Disclosure

Most homeowners in our area know they have to fill out a Property Condition Disclosure form when they are selling their home. And most people know that they are supposed to disclose any adverse facts about the home's physical structure, such as a past water leak or a problem with the foundation.

But occassionally agents and homeowners are faced with selling stigmatized properties - properties that have emotionally distressing histories. Stigmatized properties include homes where a violent crime has occurred or where a previous occupant was infected with HIV. So what do you have to disclose in these situations? According to Tenn. Code Ann. 66-5-207, real estate agents and homeowners do not have to voluntarily disclose

1. Whether anyone who has ever lived in the home was infected by the HIV virus or "other disease which has been determined by medical evidence tobe highly unlikely to be transmitted through the occupancy of a dwellingplace."


2. If a felony occurred on a the property.


3. If a suicide occurred on the property.


4. If a homicide occurred on the property.

According to the code, these are all things that would not affect the dwelling's physical structure, and therefore are not "property conditions" per se.

Even though homeowners do not have to disclose violent crimes in their property disclosures, their agents are required to honestly answer any questions potential buyers may have about such crimes having occurred in the home. If you want to know if a violent crime has occurred in a home that is for sale, try asking the listing agent directly. If you ask directly, and the agent has knowledge of such a crime, he or she is required to tell you.

The same is not true if you ask about HIV or AIDS. According to Realtor magazine:

"As part of its fair housing rules, the U.S. Department of Housing and Urban Development has said it's illegal for real estate professionals to make unsolicited disclosures that a current or former occupant of a home has AIDS, and advises practitioners not to respond to direct questions on this topic from buyers."

Oh, and rumor has it that we also do not have to disclose whether or not a home is haunted. Boo!

Before You Make That Lowball Offer...

Lowball offers are the new black. Every time I go to the office, I hear another horror story about someone's client who insisted on submitting an obscenely low offer on a home, because said client has heard about how horrible the real estate market is. 9 times out of 10, two things are going to happen in this scenario:

1. Seller counters back at near listing price, offended by the lowball offer.

2. Seller rejects offer outright, offended by the lowball offer.

And a lot of times the buyer winds up losing the house either because someone else submits a reasonable offer, or because negotiations break down due to seller's aforementioned offense at low ball offer.

I blame all this lowballing on the media hype over "the national real estate market." The fact that there is no national real estate market escapes these people's notice (more on that later). Buyers think that the collapsing "national market" means they are going to steal houses in Knoxville.

As I've said here before, just because every business pundit on every news channel in the country is saying the real estate sky is falling, that does not mean that it's falling over Knoxville. Yes, we're in a buyer's market and buyers can definitely get away with asking for more concessions now than they could a few years ago. And that's a great thing for all you buyers out there. But with few exceptions, you're not going to get that $250,000 home for $200,000. Really, you're not. Sellers in some parts of the country may be desperate to sell, but most sellers here aren't. They're just really anxious to sell and there's a big difference between those two.

Having said all that, the lowball offer definitely does not have it's propert time and place. But let's start off by looking at where and when it is not a good idea:

• You really want the house.


• You're doing it "just to see" if you can get it, even though the comps and condition do not support a number anywhere near what you're asking.


• You want/need a lot of concessions from the seller.


• Your agent has strongly advised against it, knowing that you really want the house and/or the comps & condition don't support it.

If any of the above is true, you can stop reading this post and go make a reasonable offer.

If you're still in the running to lowball, you need to find out a few things. Ask yourself and/or your agent the following questions:

• Is the home overpriced?
  

Or maybe even grossly overpriced? Your agent can pull comps for you and help you find this out. If it is, your lowball offer is not really a lowball offer at all - it's a reality check for the seller

• Is the house falling apart, but is priced as though it's not?

Market comps ususally assume a home is in market ready condition. If the seller has priced his home at market, but the roof is falling in and it's 1972 inside, a lower offer might be justified.

• How long has the property been on the market?

The current listing sheet may say the home has only been on the market 30 days. But a quick look in the MLS may show you that this is the 3rd time the home has been listed, and all told, it's been on the market for over a year. Longer time on the market means more negotiating power for the buyer.

• Is the property vacant?

Has it been that way for a while? Nobody likes to have a house sitting empty, epecially when the house is in Knoxville and they are in Honolulu. Insurance companies don't like it either. And nobody likes making two mortgage payments.

• Is the seller motivated?

This is something you can't always know up front. But if you somehow find out the seller is getting divorced/about to go bankrupt and has to move that property, stat, then strike while the iron's hot.

• Are you hoping/needing concessions in the contract?

I mentioned this before, but it bears repeating. This is a can't have your cake and eat it too thing. If you need the seller to pay closing costs or pay for repairs up front, lowball is probably not the way to go. It adds insult to injury.

• Are you prepared to walk away from the house?

Repeat after me: the lowballer shall not get emotionally invested in a property. The lowballer must always be willing to walk. Lowballing is gambling, so be prepared to lose.

Ok, so you've asked the important questions and you have a yes answer to two or more. Now you want to lowball! Slow down, grasshopper. You have one, last very important task to complete -

Find out what the seller owes on the property.

It is very rare that a seller is able to afford to write a check at the closing table, much less agree to do it. In some situaitons coming out even will suit the seller fine, but paying someone to buy their home will not.

Once you know what the seller owes, you and your agent can formulate your offer accordingly

At this point, I will ask you one more favor. Please, please, please, please -

listen to what your agent has to say!

Because you do have an agent, right? And he or she is a professional, correct? Real estate is their job and negotiating contracts is their bread and butter.
If you don't trust your agent enough to listen to their advice, then maybe you should find another agent. Seriously.

Once you have your agent's blessing, go forth and lowball. It's apparently the hip thing to do.

Property Virgins

For me, watching home buying shows on cable when I get home from a long day of listing appointments, house showing, and contract negotiations, is probably the very last thing I want to do. Who wants to watch work after work? So when one of my clients, a first time home buyer, started talking about a show called "Property Virgins" a few nights ago, it was the first I had heard of it.

So, imagine my sense of deja vu when I was reading today's posts over at fivecentnickel and saw this:

"I was watching the show Property Virgins for the first time the other night, and I was shocked at what I heard on that show. Let me give you a rundown…
The buyer was a single woman who wanted the best quality in a house, but didn’t want to spend a lot of money. She knew exactly what she wanted and how much she wanted to pay, and she wasn’t willing to budge much on either issue.

The property expert seemed nice enough, and she was a saint for dealing with the opinionated buyer, but halfway through the show, she said something that stopped me cold. She had just shown the buyer a home that was brand new and had everything the buyer wanted. The problem? It was $40,000 more than the buyer wanted to pay.
The ensuing conversation went something like this. These aren’t exact quotes, but you’ll get the idea.

Expert: The price on this property is $240,000.

Buyer: What? I definitely can’t afford that!

Expert: That’s about $1700 a month, not including insurance and HOA fees.

Buyer: The insurance and HOA fees are extra? I really can’t afford that. This is what I want, but I’m not paying that price.

Expert: Well, there is another option. We can do a 35 year loan and bring your payments down to $1500 a month.

Buyer: That’s just so much money! I can’t take on that much debt! (I was cheering for her at this point).

Expert, talking privately to the camera: She’s only thinking about the big number here. She can easily afford the monthly payment. That’s what she should be looking at… Whether or not she can afford the monthly payment."

The writer of this post, Lynae from Being Frugal, is absolutely right to be horrified. Most of my first time buyers aren't looking anywhere near the price range described above and even then, I know that as little as $5,000 or $10,000 can put them over the edge. If you're working with a buyer's agent (and hopefully you are) and you feel your agent is pushing you to view or buy properties that are out of your financial comfort zone, you might want to first confront your agent. Be very clear about how much you have been approved for by your lender and/or what you are comfortable borrowing. Just because you qualify for $200,000 doesn't mean you have to buy that much house on your first time out. If, after talking to your agent, you feel like you are still not being heard, it may be time to find a new agent.

And what about "only thinking about the big number"? What else are you supposed to think about? That's why they call it the bottom line, fool. It is absolutely essential to consider HOA fees and property taxes when calculating the monthly payment for a property.

Take property tax. In Knoxville, for example, if your new $100,000 home is only in the county, and you're taxes are roughly $600 per year, that's $50 per month added to your payment. But if your home is in the city as well as the county, you're going to have roughly double that amount, meaning you're going to be adding roughly $100 per month to your payment.

HOA fees , especially for condos, vary widely in our area and what you get for that money also varies widely. I've recently been looking in the $100,000 range with the above-mentioned first time buyer, and HOA fees for those properties range from $50 per month to almost $200 per month. Paying an extra $200 per month, in addition to the property taxes, on a $100,000 home is a pretty big pill to swallow.

As I've said before, a home is one of the biggest investments of your life, so ask as many questions as you need to up front. And educate yourself. The rest of Lynae's post brings up some very good points for first-time homebuyers to ponder before they buy.

As for me, I'm going to continue to watch all of my CSI-like forensics shows after work and let all the forensics people watch the home buying shows.

First Time Homebuyers, Think For Yourselves! fivecentnickel.com

Negotiating in a Buyer's Market

Lowball offers are the new black. Every time I go to the office, I hear another story about someone's client who insisted on submitting an obscenely low offer on a home, because said client has heard about how horrible the real estate market is. This drives most of us crazy because 9 times out of 10, two things are going to happen in this scenario:

1. Seller counters back at near listing price, offended by the lowball offer.


2. Seller rejects offer outright, offended by the lowball offer.

And a lot of times the buyer winds up losing the house either because a) someone else submits a reasonable offer, or b) because negotiations break down due to seller's aforementioned offense at low ball offer. Either way, nobody winds up happy.

As I've said here before, just because every business pundit on every news channel in the country is saying the real estate sky is falling, that does not mean that it's falling over Knoxville. Yes, we're in a buyer's market and buyers here can definitely get away with asking for more concessions now than they could a few years ago - a great thing for all you buyers out there. But with few exceptions, you're not going to get that $250,000 home for $200,000. Really, you're not. Sellers in some parts of the country may be desperate to sell, but most sellers here aren't. They're just really anxious to sell and there's a big difference between those two.

Most home sellers out there right now aren't looking to get rich. They're just looking to sell their home for more than they paid for it, and definitely for more than they owe on it.

But it's human nature to haggle. If people don't negotiate, they don't feel like they got the best deal they could.

While lowball offers are definitely warranted in some situations (I'll be covering that topic in a future post), most of the time it's that good old fashioned negotiating that gets you a good deal. Not a steal, but nothing to sneeze at either.

Like I said, it's a buyer's market out there. That means there are more houses for sale than buyers. Increased inventory means:

• More choices for buyers.

Instead of there only being one house for sale in your price range in a chosen area, there might be three or four or even five. This means you are much more likely to find exactly what you want, rather than having to comprise on certain things because there's only one house available in the neighborhood.

• Longer days on market for most listings.

This takes away the need to rush into an offer. Time was when a client would find a house they loved, decide to sleep on it, and wake up and the house was sold. Bummer. While this can always happen, the odds are a lot lower now, which gives, you the buyer, a little more time to make your decision to pull the trigger.

• More negotiating flexibility.

Two years ago there was very little of this. Many times sellers were getting multiple offers on homes, so the sales price would actually be higher than list price. Having a little wiggle room, like 2-3% of list price, is pretty nice.

• Buyers can ask for more concessions.

This was also somthing that wasn't nearly as likely to fly a few years ago. Need some closing costs? Ask for them. Want repairs made on the house? You might get that too. Home warranty? Certainly can't hurt to ask.

Sometimes you can negotiate all of these things into your offers. Sometimes you'll only get one or two. The trick is to be smart, not greedy. Think about what you really need (closing costs) or want (lower price) and go for it. But before you do, go find yourself a good buyer's agent? Please?p>

Why You Should Use a Buyer's Agent

I am constantly amazed at how few people know how Realtors operate. Even people who have been around the home buying and selling block quite a few times are unclear on what roles we play in a real estate transaction, what we can and can't do by law, and even how we get paid.

One of things that always blows my mind is how many people buy a home directly from the listing agent. Now, this isn't necessarily a bad thing for you, and, trust me, there is nothing we love better than selling our own listings.

But know this: you are absolutely 100% entitled to have your own agent represent you in your home buying transaction. And as much as I love getting the much bigger commission check that selling my own listing gets me, I will go on the record and highly advise you to use what we in the business call a buyer's agent. A buyer's agent is a real estate agent who is trained to work with buyers and when representing a buyer, represents only the buyer's interests in a transaction.

Why use a buyer's agent?

Well, let's say you're looking for a new house in the Knoxville area. You're really excited and so you start religiously gathering and scouring home magazines, spending countless hours on Realtor.com looking for homes that have (hallelujah!) more than one picture, and going to a gazillion open houses and being harrassed by tons of real agents who want to sell you their listings or make you their client. Annoying, right?

Next, you email and call the listing agents, trying to get more info on listings that catch your eye and either a) don't hear back from them, b) find out the house has sold/exploded/fallen into a sink hole, or c) you luck out and make some appointments to see some properties. Separate appointments. That you have to drive to in your own car. Using your own gas. $2.99 a gallon gas.

OK, so you get to these properties and find yourself thinking a) what on earth do the pictures on Realtor.com and this house have in common b) I wonder what time the train comes through the backyard, c) I wish this listing agent would stop trying to convince me that grasscloth is so out it's almost back in, or d) wow, I really like this house.
Whew! Finally! That was a lot of work, but you did it.

Congratulations! Now, all you have to do is put in an offer! The listing agent will write and present the offer on your behalf, and depending on the agent, will either default to facillitator status (try to be completely neutral to both sides) or will continue to represent the seller --either way leaving you unrepresented in one of largest and most expensive financial transactions of your life. Yikes.

Now let's look at the same scenario with you using a buyer's agent. First, you meet with your carefully selected agent (more on this later) and discuss everything you're looking for in your dream home. Your agent will start searching the MLS for you, sending all listings that meet your criteria.

After you look at all these juicy listings landing in your email inbox, you choose your favorites and tell your agent when you'd like to see them. He or she will schedule the showing appointments and prepare some information on each home, including a current listing brief and tax record.

Then you go look at houses. In your agent's car. Using your agent's $2.99 gas. Going with your agent, you are able to see 5, 6, or even 7 homes in just a few hours.

Still want to go to open houses? No problem. Just tell the host agent at each home that you are already working with an agent, and they should (by Tennessee state law) stay far away from you, leaving you to view the house in peace. Ah!

After going through the home viewing process with your agent for a few days or weeks, you find your house, the one you want to make an offer on. Your agent will help you determine an asking price by looking at recent comparable sales in the neighborhood. He or she will also help you with elements of the offer such as asking for closing costs or repair costs. Your agent then writes up the offer, submits it to the seller's agent, and negotiates the offer on your behalf, with only your best interests in mind. You get the house you want, and feel like you got the best deal possible because you were well represented by a knowledgable professional.

Much better, right?

And here's the best part: because buyer's agents in our area get paid from a percentage of the seller's listing commission, their services are absolutely free to you, the buyer. Rock!

So, now you're probably wondering how you can find yourself a really good buyer's agent, right? That's coming up in a future post. Stay tuned!