Author’s note: This is a selection from my new book, How To Buy A Home and Not Lose Sex: Find the Best House, Make the Best Offer, and Keep Your Love Life, which you can purchase on Amazon by clicking here.
In the next few weeks I’m going to cover all the closing costs I can think of, starting with the down payment (though it’s not really a closing cost) and the cost of hiring a Realtor.
Yes, You Need Money
You’ve been in the dreaming stage, hunting online and educating yourself. Now it’s time to start shifting gears toward the reality stage. It’s time to take stock and look at your finances to see if you can really pull this off.
This actually comes as a shock to some people, but yes, you actually need money to buy a house.
So in this chapter—before we even talk about shopping mortgages and applying for a loan—I am going to give you some idea of what it will cost over and above the purchase price of a home. This is the money you will need to spend out-of-pocket before you close, and money you will need at closing (known as “closing costs”).
Why didn’t I put this chapter way back at the very beginning of the book?
Even if you can’t buy the house you want right this second, with proper planning you will be able to do it in the future—very possibly the near future.
What stops most buyers short is the need for a down payment, so it’s simply a matter of reprioritizing some things and socking away some money until you have the down payment you need.
Credit issues are the second biggest stop for buying a house. I’ll cover those a little later in this section.
Let’s start with real estate agents…
How Much Do Real Estate Agents Cost?
Realtor services to buyers are normally free. You heard that right: Free.
As in no bill, no check to write, no credit card to swipe. The Realtor takes you out and shows you properties.
Except when they aren’t free.
Some companies will charge you a “transaction fee” or other BS fee on the back end. Actually let’s just call it what it is: a bullshit fee. Sorry, these things get me worked up…
In my market, the fees can range anywhere from $200 to $600, to even a percentage of the transaction, and they are paid at closing.
There are two ways you can get roped into paying these things.
The first? You sign a buyer-broker agreement before you go out, and it stipulates you have to pay one of these fees.
The second? If there is no upfront paperwork, the real estate agent will take you around to look at houses. When you go to write an offer, you will sign a company disclosure (as part of the offer paperwork) that says there will be a transaction fee at closing. Most buyers just sign the paper and don’t read it.
To be fair, real estate agents hate these things. It’s the companies they work for that mandate the fees, and if the agent wants to work for the company, he has to charge the fee (none of which goes to the agent, by the way). If you don’t pay the fee, most companies force the agent to pay the fee out of their commission.
Not every company charges these fees, but many do. Some brokerages have dropped the fee from the buyer side but still hit the sellers with it.
The only way to find out about these fees is to ask up front, when you are interviewing, and to read any paperwork before you sign it.
There are a few ways to get around these fees (if you haven’t already signed on the dotted line).
The first is to find an agent in a company that doesn’t charge one.
The second is to read the paperwork you are being asked to sign, and if there are any extra fees in there, simply refuse to sign that paperwork.
I might be wrong, but my guess is that there is no law in any state that will compel you to sign anyone’s company-specific paperwork.
And there is no real estate agent in the United States who will lose a sale over a transaction fee.
If the agent does refuse, walk into the next real estate brokerage and ask if they will present your offer. You might have to sign something that says your past agent refused to deliver your offer (in order to protect your new agent).
In Florida, the law specifically requires all agents to present any and all offers and counteroffers (unless the seller puts in writing that they don’t have to), so if you make the offer and then refuse to sign off on a buyer fee, by law they still have to present the offer.
Now, there are some buyer fees you won’t be able to avoid in any situation; you will run across them in auctions and foreclosure sales.
In the case of auctions, before you can register for the auction, you generally have to agree to pay a buyer premium if you win the auction. This means you might pay, for example, an extra 10% on top of the winning bid.
In the case of foreclosures, the bank that actually owns the foreclosure provides its own contract. These bank contracts will specify what fees you will pay, sometimes including a buyer fee. Because the bank is the seller, it has the right to refuse any contract that isn’t its own.
For example, say I bring an offer on a foreclosed house on a standard Florida contract. The agent who has the property refuses to take it, citing instructions from his seller (the bank) to refuse any offer that isn’t on its own bank contract. He then provides me with the bank contract if I don’t already have one (they are usually provided with the listings in MLS) and instructs me to make the offer on that contract, or don’t bring one.
If that’s the only way the bank will permit you to make an offer, your only choice will probably be to pay the fee and sign the paperwork. Banks can do this because the prices on foreclosures are typically lower than market; thus they never have to wait long for an offer.
Some things to think about…
Is it worth the time to go find another Realtor? Will you lose the house if you take the time to do it? Has the agent you’re working with been so good that it’s worth paying a few hundred bucks to keep working with him or her?
It is critical to ask about fees upfront, and even ask for the paperwork you’ll be making an offer on so you can verify that the fees are as stated.
There are some forms of financing (the VA loan and the USDA loan, for example), where 100% financing is available under the right circumstances. But even with these loans, you need money upfront for inspections, insurance, and so on, which I’ll cover in later posts.
Otherwise, FHA loans allow you the lowest down payment of any loan (3.5% of the purchase price).
With FHA, you have to put that 3.5% into the transaction regardless. It can be as a down payment, or for closing costs, inspections, and so on, but you have to have at least 3.5% of your own money into the transaction.
For a conventional mortgage, you are generally looking at a minimum of 5% down, and that is exclusive of any closing costs.
If you are thinking about buying a home, please consider hiring myself and my team as your Realtors. We can help you find the best house and make the best offer. Contact me at Sean@StAugTeam.com or my partner Kate at Kate@StAugustineTeam.com.