Did you know that the SELLER pays the commission for the buyer’s agent? It’s true! If you are embarking on your first home purchase, you may be wondering about that and it can feel weird to ask.Buying your first house can be intimidating on a lot of levels, but especially financially, so this is a great benefit if you are on the buy side- you get all of the services of an agent and the seller pays!
How does this work?
When someone puts their home on the market, they negotiate a fee with the agent that is listing their home. Generally, this fee covers the marketing cost of the home (advertising, flyers, listing photographs etc) as well as a commission for the listing agent (which they split with their broker) AND the agent of the buyer (usually called the “selling agent”).
So, if the listing agent charges 6% they will offer some percentage of that to the selling agent as a commission – let’s say that it’s half. If the home is $100,000 that means that the selling (buyer’s) agent will get a check for $3000 at close and they will then split that with their broker at whatever percentage they have agreed to. From whatever remains, the agent will have to put aside 30% for income taxes, some percentage for costs of doing business and then keep whatever is left as income to pay bills.
In my office, the only fee that a buyer pays directly is a $399 administrative fee and that goes to the broker as well. As part of this fee, the records on the transaction are maintained and accessible to the client forever.
And that’s it! If you are a buyer – do not hesitate to find yourself a great agent to help you through the process!
If you’ve never bought a home before you might think the best way to go about this is to drive around or check whatever app you use until you see a house you like, and then call the agent on the sign so you can go take a look.
Groovy – I guarantee they will ask you if you have signed an exclusive buyer representation agreement or not. I feel like making a flow chart here, but I’m going to stick to words…
If you HAVE signed with an agent – GREAT –call them and let them know you want to see the property. Do NOT call the listing agent. You are having your agent do the job that you have hired them to do! You are NOT bothering them.
Your agent wants to see what you see and see it not only through YOUR eyes, but also through their own. They are there as your advocates and will be looking for anything that may impact your use and enjoyment of the home. In fact, an agent is a “fiduciary” – which means that they are obligated to act in YOUR best interests! Even if it conflicts with their OWN best interests. For example – if the agent were looking for a similar property to the one that you wanted and knew that the property would suit you and that you would buy it – they would be OBLIGATED to make sure you knew about that property even though they may then not be able to purchase it themselves. You want someone like this on your side.
If you have NOT signed with an agent of your own and are walking into that house unrepresented with the listing agent you should be aware of a couple of things – 1.) that agent owes a fiduciary duty to the SELLER of the home – NOT YOU. You’re like a fly that just walked into the spider’s web. 2.) Anything that you say to that agent can and will be shared with the seller!
So if you are walking around the property and you’re beside yourself with joy because this is exactly what you’re looking for! And your budget is 10X as high as this house is priced! Isn’t that great?!? Well, now the seller knows how badly you want it AND that they probably don’t need to give any ground on the price.
But wait! There’s more! If you’re cool with all of that (and there are reasons why you might be) and you go ahead and sign with that agent for the purposes of purchasing that home you need to know a couple more things – one… that agent will “take both sides” of the commission, meaning they get the commission for both being the agent of the seller AND the agent of the buyer.
In addition to this, let’s go back to fiduciary duty … if an agent is bound to only actions that would benefit their client and they are in the middle of a transaction, representing both, they are between a rock and a hard place when it comes time for one of the key functions of an agent – NEGOTIATING and ADVISING. They can give you information about prices and time on market and other stats, but anything that they advise you cannot adversely affect the seller. Tough spot and maybe not where you want to be as a buyer – particularly if it is your first home purchase.
In MN, we are legally obligated to explain what agency relationships mean at the first “substantive contact” with a potential client. No dual agency can occur unless both parties agree to it, and in MN, dual agency means MORE than just the same AGENT representing both the buyer and the seller. This is a twist worth understanding when you are deciding whether or not to agree to double agency in MN – here is applies to any agent working for the same broker. So while I may represent you, I cannot show you a home listed by an agent in my office (my BROKER – not the company) unless we’ve agreed to dual agency. It’s like dual agency lite. Your agent will still work on your behalf, but they aren’t in that middle space between the seller and yourself and they do not get “both sides” of the commission even though dual agency technically still applies.
While agreeing to dual agency may not be right for every occasion it can be right for some. And in the current market in Minneapolis not having access to every home on the market in your price range can be a large detriment to your search. If you’re not comfortable with it and your agent has a listing of their own that is PERFECT for you – you can ask to be referred to a different agent.
Now for sellers… This has happened to me personally when I sold a house in another state, my agent had an open house, an unrepresented buyer came through and wanted the home, and our agent signed that buyer. If we hadn’t agreed to dual agency we would not have sold our home to that person and we were READY to go. So while in the end, we didn’t get too much help with the negotiating, we had already had the benefit of understanding what the market would support for our house and we could negotiate fairly comfortably, but it’s up to each seller to make that decision.
You found a house! Your offer’s been accepted! Clear sailing from here on out, right?
Well, maybe, but you should know what comes next.
As part of your offer you will submit a deposit, called “earnest money” (I did a video on that – check out my YouTube channel if you’re interested.) It’s basically putting some skin into the game so that you have some incentive to adhere to the terms of the contract and perform the duties that you are committed to on the schedule that you’ve agreed to.
You need to meet the deadlines and SO DOES THE SELLER. If you don’t, there is the potential that the seller keeps your earnest money and the house goes back on the market. If they don’t or the contingencies around inspections, appraisals and loans aren’t satisfied, you can break the contract and have your earnest money refunded.
Inspection and Appraisal
Well, as part of the purchase agreement you’ll negotiate some terms, like an inspection, the fact that the your financing depends on the home appraising for the amount you’ve agreed to pay, that you can have your financing approved and ready to go by a certain point in the process.
If you decide that you are, or the seller is, willing to fix whatever is discovered in the inspection, or if you can work out a credit to the price to compensate for the issues (and there are ALWAYS some issues!), the process keeps moving – if not, you can ask for a refund of your earnest money and look for something else.
At the same time, the lender is completing your loan approval. You’ll want to be very responsive to your lender as they request documents etc, because missing a funding deadline can either delay closing or put you in breach of your contract enabling the seller to keep your earnest money and sell to someone else.
As a part of obtaining financing the lender will also order an appraisal of the home. The bank wants to know that the collateral on their loan (the home) is worth what they are lending you and they will be able to sell it and recoup their money if you default for some reason.
If the home does not appraise for the amount that you’re borrowing, a few things can happen. You can renegotiate the price downward to make up for the difference, you can come up with the cash to make up the difference, or you can walk away if the financing contingency is not met and specified in the contract.
On the flip side, homes have been known to appraise for MORE than you’ve agreed to – in this case it’s like you’ve been given a prize because it’s effectively instant equity in the home that you didn’t have to wait or pay for. Yay!
While your lender is working on your loan, you’re having your inspections done and the sellers are making their repairs, the title company is doing a search to make sure that the title is clean and there are no other claims on the home so that you can take possession at closing. When you get to the closing table you will be encouraged to buy title insurance, and that is a very good idea! Should something come up in the future, you’ll be protected.
Now it’s getting real!
The night before or the morning of closing, you will go to the home and take a walk though. You’re looking at the condition of the home to make sure that everything you expect to see there is present and in the right condition, that the home looks the way it should and that when you sign the papers and the home becomes yours that the house is the way it should be.
Your lender will let you know to the penny what you need to be prepared to bring to the closing table financially. They will also tell you how that money will be transferred – often it is simply a wire transfer from the bank.
You’ll sign a lot of loan documents that reaffirm the interest rate, dollar amount, how much the loan will cost you over the term, how long the term is, when payments are due etc etc. And, if you are in MN, you will leave with a set of keys to your home because you take possession immediately unless you’ve agreed to another arrangement.
If you will be living in the house, do NOT forget to file for your homestead exemption!! This is a big discount on your property taxes because you’re occupying the house. You’ll get this info at the closing table, but make sure you put it on the top of the pile so that you don’t forget.
Once you have determined that you are financially ready, you’ve selected an agent, and you have that pre-approval letter in hand, you are ready to start looking!
See what is out there…
Many buyers will have already started looking at what is on the market via online real estate sites, Realtor.com, etc, but be cautious with Zillow! It is notorious with agents for having very outdated or inaccurate information. People often find listings on Zillow that are under contract and not available or have not been taken off the site despite being sold.
You’ve selected a realtor, hopefully you had a conversation about what things you MUST have – how many bedrooms, where the home needs to be located, if it needs to be single level living, etc, so let them send you listings. You decide how often you want them – Immediately? Daily? Weekly?
We have access to the MLS and the information on there is ACCURATE. You won’t be looking at homes that aren’t available. We can select very specific areas via a drawing tool on a map, search by commute times to and from your job at particular times of day, add or eliminate homes based on very specific criteria that is important to you – patio space? Gym in a condo building? Access to a pool? Main floor bath? Let us send you what YOU want to see.
Understand how the market is behaving…
Buyers should look for a home that fits the 80/10/10 rule – 80% of what you love, 10% that you can change, and 10% that may not be your favorite but you can live with it.
Your agent can help you learn what the market is like in your area – is it a buyers market or a sellers market? What percent of asking price are sellers able to get on their homes? How long is it taking for sellers to get their homes under contract? Do sellers typically contribute to closing costs?
Realize that depending on the market you may not get your offer accepted on the first home. At this moment in Minneapolis, anyone buying a home under about $350K can expect to have some competition on their offer and also needs to be prepared to act quickly. In other words, it’s a sellers market and your best bet is to make the most attractive offer possible.
Head out and view properties!
Finally – start looking with your agent. Plan to give 24 hours notice if at all possible. Selling is hard – people want to clean, they may have kids and dogs they need to take somewhere, it’s just courteous. Best case scenario they have moved already and the home is available to show as needed, but be prepared to give some notice.
Do you have questions? Click one of the links below or leave a comment!
So, you’ve been thinking about buying a house and the process seems overwhelming and like a big black box. If you are wondering what steps you should take, start here.
Step 1 – Finances
This is the biggie for most people. You need to take a look at your financial situation and figure out if you are in a position to take this step and if NOT, make a plan to get there.
Know your FICO score!
This is the score that lenders use to determine your credit worthiness. It’s a combination of the 3 scores given to you by the credit agencies. You can sign up for a free service like Credit Karma and see where you are at a given time. Some lenders will accept credit scores as low at 620, but most want 640 or higher. And if your score is on the lower side and you can easily clean it up, it’s to your advantage to do that first – lenders charge higher interest rates to those that have lower scores, so your loan will cost you more.
If you have been in the military, chances are that you are eligible for a $0 down payment mortgage. The VA mortgage is really the best deal out there – look for a video on that soon because if you have served this is definitely a benefit that you should be taking advantage of.
For the rest of us, the minimum down payment is typically 3.5% of the cost of the home. So, if you were to buy a home at the average price in the Twin Cities ($280,000) your down payment would be $9,800. In MN, you may qualify for downpayment assistance of up to $15,000 depending on where you live and other qualifications.
I did another video on my YouTube channel about FHA Loans, and also one covering a mortgage offered by Habitat for Humanity that has incredibly good terms for first time buyers. Check the link below this post to see my YouTube channel.
This is the area that I think is often underestimated or not planned for.
You should be planning to have about 3% of the price of the home available to apply toward closing costs. These are separate from your down payment and while we are often able to get sellers to contribute to closing costs it’s not always the case. You’ll want to have this money available.
If you have it and the closing costs are covered by the seller – more to the good to you because you start your life in your new home with a nest egg to use for emergencies or things that you’d like to add. You don’t want to buy a home and then be “house poor”.
Find an agent
Did you know that the SELLER pays our fee?
That’s right – you get the benefit of someone knowledgeable about the market, who knows how to navigate these transactions, works to make sure that you are protected, and you do not have pay their fee!
Things that you should consider as you decide who should help you with what is likely the largest purchase you will make –
Is this their full time job or are they trying to squeeze it in around their other job and commitments? You want someone who isn’t doing this as a side gig, it’s serious business.
Do you feel comfortable with them? Buying a home is also very personal and often can be stressful if there are extenuating circumstances, pick someone that you feel you can trust to be in your corner.
Look for recent reviews or testimonials from other clients.
Are they a solo agent or are they working on a team? If it’s a team, they usually have a lead agent that primarily handles sellers and then they assign buyers to other members of the team. So you may be passed around to a lot of different people in that situation vs working with a solo agent where it is a very one-on-one relationship.
Preapproval means that the bank has decided that you are worthy of a loan after actually looking at your credit. It’s a step beyond “prequalified”. You will know what you can afford to buy and won’t look at places that are out of your range.
Having a piece of paper that says this is critical to getting your offer accepted by the seller. Sellers do not want to take their property off the market only to find out that you are unable to buy the home.
This is another benefit of finding an agent to work with – we are in the business and working with loan officers is our daily business. We know who is responsive and works on our client’s behalf (and who is not).
Agents want the best outcome so they will help you find a lender that will help you get there. They are NOT paid by lenders, there is no “kick back”, or any financial benefit to send a client their way. Agents benefit by having happy clients at the end of the day.
Have a question or are you interested in getting information about another topic? Are you thinking of buying a home in the Minneapolis area? I’d love to hear from you!