A Homebuyer's Guide to Understanding Real Estate

By Donald J. Welsh, Ed.D.
Illustrations by John Bennetts

There are Many Advantages the Buyer Receives when Represented by a Buyer Broker:

1. The agent's fiduciary responsibility is to the buyer.
2. The agent will not disclose financial status, any communication (including body language) or other data to the seller that would weaken the buyer's bargaining ability to get the best home at the lowest possible cost.
3. The agent will provide sold comps that will enable the buyer to determine the true value of the home the buyer is about to purchase.
4. The agent will attempt to find information that may reveal the sellers need for a quick sale.
5. The agent will help the buyer to identify construction defects and recommend the employment of appropriate inspectors to ensure that mechanical, structural, environmental, and infestation problems are identified.
6. The agent will negotiate the offer to benefit the buyer rather than the seller.
7. The agent will use contracts that are designed to protect the buyer.
8. The broker can be held legally liable when an agent through errors or omissions, fails to provide the quality of service expected as a standard in the industry.

What is Likely to Happen when Selecting a Buyer Agent who is Associated with a Broker that Lists Homes?

There are many good professionals with impressive credentials associated with traditional brokers who list homes. The reasons associations continue to exist is that earning potential is so much greater when the agent can earn both listing and selling commissions. No matter how skilled and service-oriented their professionals are, all agents associated with a broker that lists homes have problems that are not easily overcome when working as a buyer agent.

1. If agents are going to assure the buyer that they will commit to carrying out the buyer agency role, they will not be able to show the buyer any homes listed by their company. Therefore, many good homes may be eliminated from choices available to the buyer.
2. Most agents that work for sellers as well as buyers have a difficult time developing professional attitudes and behaviors that consistently best serve the buyers.
3. Agents who specialize as buyer agents tend to develop a much greater skill at analyzing and providing for buyer's needs.
4. If the agent representing the buyer chooses to show company listings, dual agency must be disclosed. The buyer is then left without representation. The agent cannot legally represent either the seller or the buyer. In a practical sense however, the agent knows information about the buyer that could be passed on to the seller if the process is not closely monitored.
5. If the buyer is left without representation, the buyer has no legal protection unless the agent carries out a fraudulent act.

Who Pays for the Buyer's Agent Services?

Agents representing sellers would like buyers to believe that the buyer's agent is going to charge a service fee. These agents promote service and no fees. The something for nothing philosophy of the seller's agent is an illusion.

The practice in the real estate industry is to have the seller sign a listing contract with the broker to sell his home. This contract will specify the commission that will be paid from the proceeds of the sale upon closing. When the listing is entered into the multiple listing service computer system, the broker specifies the commission that will be paid to the selling broker.

Whenever an agent secures an offer to purchase the property from a buyer and the seller accepts the offer, the agent earns a selling commission that is paid by the listing agent's broker. The broker in turn pays the agent a percentage of the commission. There are no regulations which prohibit buyer brokers from receiving the selling broker's commission, therefore, buyer agents may legally serve buyers and be paid the commissions which typically go to the agents that represents the sellers.

In reality the buyer pays the cost of selling the home as this cost (commission) is built into the price of the home. It behooves all buyers to secure the services of a buyer broker who will represent them. In most cases there are no cost differentials for the service, there is however a significant purchase price difference of the home. (KC Metro Home Finders, a buyer broker in Kansas City, has documented that its clients over a period of one year averaged home purchases that were 12% under the list prices while the industry averaged purchases at 5% under the listing price.)

There are some buyers brokers who charge a retainer fee at the time of signing an agreement. These retainer fees are generally returned at the time that the broker earns a commission generated by the buyer's purchase of a home. The buyer can also request that a set fee be charged for the buyer agent service and be paid directly by the buyer. In these circumstances the agent should negotiate a purchase price reduction, lowering the cost by the amount of commission that would have been paid to the selling broker.

If the buyer is to purchase a home which is for-sale-by-owner it is a common practice to have the agent build into the cost of the home an agreed upon commission. This practice allows the cost of the service to be financed by the home loan. Even though the buyer could purchase the home without going through a broker, it is important to have the protection of using a buyer agent. The alternative is to use an attorney. While the attorney will be able to provide counsel in reference to the contract and title, buyer broker services of ascertaining home value and negotiating the contract are invaluable.

Environmental Hazards

Homebuyers should have a basic knowledge of environmental hazards that may be present in property considered for purchase. The most prevalent of these hazards are radon, lead and asbestos. Varying amounts of exposure to these gases and minerals can cause cancer. While your primary concern is for the health of your family, a secondary concern should be what is the financial impact of purchasing property containing any of these hazards?

Radon is the most common of the above hazards. It is an odorless, tasteless, colorless gas that comes from the natural breakdown of uranium in soil, rock and water. Radon is always present, but can build to an elevated level inside houses. While there are no known safe levels of radon, the Environmental Protection Agency suggests that radon levels not exceed more than 4 picocuries per liter of air (pCI/L).

Any home is suspect. Radon is found in new homes as well as older ones. The levels of radon will vary from house to house within the same subdivision. The only way to tell if a house has radon is to conduct a radon test. Home inspectors and radon specialists normally use monitors and the cost ranges from $30 to $125. Proper treatment will minimize the level of radon. Average cost of radon mitigation is $899 to $1,500; around $1,100 is the national average.

Asbestos, an insidious fiber found in homes that were built prior to 1980, is a fibrous mineral that was used in the manufacturing of building materials such as:

• Cement board shingles/under-sheeting
• Roof felt/shingles
• Window putty
• Fill and batt insulation used in attics
• Sprayed ceiling texture/acoustical tile
• Boiler, heater and pipe wrap
• Flooring (vinyl sheets and tile)

Remodeling, repairing and cleaning activities can cause the release of the fibers. Entering the body through breathing, swallowing and skin abrasions, these fibers can cause lung cancer and mesothelioma.

Certified inspectors determine the presence of asbestos by taking bulk samples of the suspected material and have the sample analyzed at an accredited lab. The removal of asbestos containing material can be very expensive. Certified asbestos project designers can provide estimated costs for such removal.

Lead Based Paint: People are exposed to lead from numerous sources, including painted surfaces. Lead was a major ingredient in paint through 1978. While adults may suffer various ailments due to excessive lead in their blood, the groups most at risk are infants and children under seven years of age.

Deteriorated paint that is either weathered cracked, or peeling has the greatest potential as a health hazard. The hazard can occur through the inhaling of dust created by abrasion, scraping, or sanding and the natural process of "chalking".

While the seller of the home is not required to test for lead based paint to inform the buyer of the presence of lead, any known presence must be disclosed. When concerned, the buyer should request an inspection.

Inspection will include on-site testing with immediate results and chemical laboratory paint chip sampling. The cost can range from $300 to $500. Laboratory analysis of paint chips only, with about the same costs will generally require one or two weeks for the results. Recommendations for lead-based paint abatement will be provided, following on-site and laboratory testing.

State Regulations

All states require that anyone who sells real estate earning a fee must be licensed with the state in which the property is located. Agents and brokers are bound by the "Law of Agency" to represent the sellers unless a written agreement is signed to have the agent represent the buyer.

When the seller hires the broker (lists property with the broker) to sell his property, the broker's agent and all other agents (unless under a written buyer agreement) become sub-agents to the broker. The broker and these agents have fiduciary duties to the seller. While these duties are complex, they can be simplified by one main point; the agent must put the seller's interest first, above anyone else. Agents must be loyal, obedient, and trustworthy to the seller. Agents must keep confidential all information that would jeopardize getting the highest possible price for the property. Agents must also disclose any information they have about the buyer to the seller which would effect getting more for the property than the buyer offered.

When under a written agreement to represent the buyer, the "Law of Agency" requires that the agent have a fiduciary duty to the buyer. Therefore, the agent must be loyal, obedient, and trustworthy to the buyer. The agent has the duty of helping the buyer secure the best home at the lowest possible cost. The agent must keep all information about the buyer, that would in a negative way affect the acceptance of the offer, confidential.

It is legal in many states for an agent to represent both a seller and a buyer through a signed disclosed dual agency agreement when purchasing a property listed by the agent's company. While it is legal, a buyer should avoid purchasing property through disclosed dual agency, as the risk of having important information disclosed to the seller is too great. Many states have passed legislation that allows a broker to appoint designated agents, on the sale of in-house listing, to avoid the legal liability associated with dual agency. A problem with service under a designated agency status is that the broker can not supervise these transactions unless state law provides for a transaction broker status. As a transaction broker, the broker has no agency responsibility to either the seller or the buyer. With this status the broker also has less liability to the parties of the contract.

Most states have disclosure laws that require agents to inform prospective buyers of their agency options. These regulations may differ from state to state. The disclosures may be oral until such time the buyer is ready to sign an offer to purchase. At that time, the buyer is generally asked to sign a document indicating that the agent had provided an oral disclosure of agency options. The buyer should always question the agent until they get what is considered an informed disclosure. An informed disclosure is one in which the buyer understands all the implications of the various agency options.

The Home Buying Process Checklist

• Select a bank, savings association, credit union, or mortgage company where you can secure a home loan.
• Complete a loan application and ask that all information required for the file to be collected immediately, including the credit check. Do not pay for a property appraisal cost at this time.
• Upon learning what your maximum loan limit will be, make a request that your loan officer only respond to written loan approval verification by the seller's agent. Request that all other information be kept confidential.
• Determine a maximum home price that will allow you to maintain a manageable budget and desired living style.
• Select a buyer agent who is associated with a buyer broker.
• Determine the length of time you will expect to be living in your new home: ___ 0-5 years; ___ 6-10
  years; ___ 11+ years.
• Identify your community needs.
• Identify your home needs and desired home style. Set realistic expectations.
• Set a time schedule for search and purchase of the home.
• Develop a profile that can be used by your agent to illustrate why your offer should be accepted. Use topics such as low risk, pre-approved loan, can close quick, etc.
• Select at least two homes that are suitable for purchase so you can avoid the need to purchase the preferred home at an inflated cost.
• When two homes are found have your agent secure comps for the subdivisions in which the homes are located.
• Analyze the sold comps to determine the true value of the homes.
• Survey the neighborhood, ask questions of the neighbors, learn all you can about neighborhood benefits or problems, and why the seller is moving and if there is urgency for his move. Buyers should do this as they may get more information than an agent may.
• Discuss home price and conditions of the offer with the buyer agent. If you want a good buy make the first offer one that will be rejected, however sufficient enough to get a counter offer. Be willing to walk away from the negotiations and make an offer on your second choice. See the "Purchase Offer Checklist" topic for conditions that should be addressed in the offer.
• Upon acceptance of the offer, develop a schedule of activities that will need to be coordinated and completed prior to closing.
• Plan events that can be used to reduce stress. This can be the most stressful time of the home purchasing process.
• Close on the home, move in and enjoy the rewards of buying a home with the service of an exclusive buyer broker.

Home Affordability Guide

The following guide provides the maximum home sales price you can qualify for based on: monthly income, maximum monthly payments, and other monthly debts as identified by an expected fixed interest rate for a 30 year conventional loan.

General Guidelines for Loan Qualification

• Two years of employment history with present employer (or a new job within the same industry and an increase in salary).
• If paid commissions: use monthly average over past two years; If income is from self-employment, tips, etc. compute average monthly income document on tax forms.
• Calculate both the husband and wife's income. Include all monthly debt obligations that extend beyond six months (including alimony and child support).
• Good credit, as identified on national credit agency reports.
• Timely payment of home or apartment rent.
• Cash to close: Conventional loans will require 5% of purchase price as a down payment; closing costs will be approximately 3.5% of loan. FHA loans will require approximately 6.5% of sales price for closing.

Calculate Your Own Maximum Home Loan Payment

To calculate your own maximum home loan payment PITI (principle, interest, tax, and insurance) for a conventional loan, use the following steps:

1. Multiple monthly gross income by 36%. This is the maximum debt payment, which includes long term monthly payments such as auto loans, student loans, credit card minimum payments, child support, etc.
2. Multiple monthly gross income by 28%. This will be the maximum PITI payment assuming the payment plus the total monthly debt payments do not exceed the 36% total. If it exceeds the 36% total, subtract these dollars from the 28% total to determine your PITI.

How to Review Personal Credit Histories

Obtain a copy of your personal credit history by making a written request to each of the following collectors of information. Reports will cost between $6 and $12 for an in-file report and up to $55 for a full merge file report.

Your written request for copies of your credit history must include the following information:

• Full name
• Addresses for the last five years (include zip codes)
• Social security number(s)
• Date of birth
• Current employer
• Day and night phone numbers
• Signatures

Send to:

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