Expert: John - 5/31/2008

Question
Hello!

My question pertains to taking on a buyer's agent or trying to purchase a home on my own.  Let me explain the details.

I am 24 years old and my annual income is around $55,500.  My wife-to-be and I have been looking at home locations that will best serve both our needs...Our job sites are roughly 60 miles away from each other, so we want to move as close in between as we can.  We have found the exact neighborhood we want to move into.  Driving around looking at houses in this neighborhood, we found one house in particular we really like.  The home is listed at $172,900.

Here's my question...We have found the neighborhood and house we would really like to view and potentially make an offer on.  I am concerned that I cannot comfortably afford a loan to cover the purchase of this home.  I believe I may be able to negotiate a better price for the home on my own without an agent by writing in the contract that the seller's agent waive all commission fees greater than 3% of the agreed upon sale price of the home.  I'm told that the seller signs a contract such that 6% of the sale is commissioned between the seller's agent and buyer's agent.  Well, cutting 3% of the asking price right up front would knock the asking price down $5187 without affecting any of the parties' bottom line one bit except mine.  From here, negotiating down from $167,700, I feel like I could more easily talk the sellers down to a home loan I could afford.

I have roughly $20,000 in the bank that I can put towards a down payment/closing (and my parents have both offered to loan me a few thousand each if needed).  I had considered setting my maximum purchase price at $160,000.  Doing this, I would like to try and take out an 80/10/10 loan and pay $16,000 down and borrow only $128,000 as a primary mortgage loan.  Wouldn't this be my lowest monthly payment option if I can afford to do such?  The only other recurring monthly payment is my car loan which I financed at 0% for 36 months.  My monthly payment is $582 on this car, but I was looking to refinance at a local credit union offering no payments for 3 months and a 3.75% 60 month loan term in order to cut my car note to $300 a month and also put ~$1800 in my pocket over the next 3 months to comfortably build some rainy day cash.

So to sum up, if my wife-to-be and I have found our "dream starter home", can I handle the buying process myself dealing with the seller's agent?

Will they help me take all the necessary steps and paperwork to complete the purchase (me knowing all the while that they DO NOT represent my best interest...I would definitely read, understand, and ask all questions)?

Is it true the seller signed a contract to offer 6% to the realtor?  If so, is it ok to write in the contract that the seller's agent waive any commission of the agreed upon sale price above 3% (and as we get through the negotiation process I will even try to knock this down to 2.5% as I intend to offer $140,000 as an opening offer with a 3% waive and seller to pay 3% of closing costs).

And finally, in this single neighborhood a friend recently closed on a home that is about 150 sq. ft. smaller at $160,000 (appraised at $165,000) after the home sat on the market for 10 months.  There are other homes in the neighborhood that have been on the market from 8 to as much as 14 months!  Are roughly 10 homes for sale within 3-4 blocks of this small subdivision, this being the nicest of the homes currently on the market for sure.  So, I don't expect the seller's to agree to sell a home for $140,000 with a list price of $172,900 and a fair market value that would appraise for around $170,000.  Would offering $140,000 be seen as a "slap in the face" or would their seller's agent simply tell them that this is a common tactic and I am simply gauging how much they are willing to negotiate?  Do sellers ever consider breaking negotiations with a potential buyer over a really poor first offer?  Would making an offer like this be viewed differently if I had a buyer's agent as opposed to going it alone?

I have asked you a lot of questions.  I apologize for the length of this and greatly appreciate any feedback you may provide.  Thank you so much in advance!

Steven

P.S. - I live in Alabama.  I made the assumption that all 50 states would hold the same law about signing a contract for commission with an agent and then asking that agent to waive fees...If this was not true I just wanted you to know I am in Alabama.

Answer
Well Steven, you do ask a lot of questions, but thats good.

I will be right up front.

No Realtor will cut there commission.  They need to make a living also.
Remember, a Realtor only gets paid when they sell a house.  So if they are slow, they are making less then you.

Lets break this commission down.

I will base this on a 6% listing.

House listed for 6%.

Option A -
House sells with a buyers agent.

That means the seller agent gets 3% and the buyer agent get 3%.
Then each agent has to pay half to there broker.  So each agent is now down to 1.5%.

Now each agent has to pay there ins fees, which is a small amount.

So each agent is only making less then 1.5% commission.  Base that on $170,000 Thats only 2580.00.  Minus 1032 for taxes.  Thats only 1548 each will make.  Sounds like a lot.  Thats only $9.68 hour for one month of work.  ( based on 40 hours a week for 4 weeks. )  Most work 70 hours a week.

Also, a seller signs a contract with a Realtor.  That commission fee, cannot be reduced once signed.

So there is no way to reduce the commission as you would like, and you wouldn't fine anyone you would if you could.

From what you told me, you are pricing yourself to high.  You should look more around the $135,000 and no higher then $150,000.

As for the 140000 offer.  You could.  They may counter at 150 or 160.
Its a start point.  BUT, you are right, here.  To low, and they will refuse it and not even consider you.  So it could kill any talks.

And each state has different laws, but this is more or less the same I would guess.

So I would recommend you look at a lower price and get yourself a Realtor to help you.

Also, I almost for got you asked.  A Realtor, a sellers agent here, can not and more likely would not, but can not help you with the paperwork.  Thats why they are called a sellers or buyers agent.  This would not even fall under the dual agent.

Also, I have never heard of a 80/10/10 loan.  80/20 or 90/10 or even a 75/25 yes.  But never a 80/10/10.

Good luck,
John