Save Fortune Purchasing Home without a Buyer’s Agent

Buying a home or investment property can be very stressful. This is a large purchase, and unless you are very wealthy, this purchase is for multiples of what you spend at any other time. Conventional wisdom says you should get a realtor, a buyer’s agent who is an expert in the field to help you out.

Reasons not to use Buyer’s Agent

There are a lot of amazing realtors who will help you immensely, and may even almost add as much value as they are getting paid. These realtors are almost impossible to find. The barrier to becoming a realtor is low, there a perception that realtors make a huge amount of money. They do per transaction, but due to there being so many realtors, they do not make a lot of money per year, there just aren’t enough transactions to go around to all the realtors.

So this leaves home buyers (whether to live in, or for investment), left with a small number of great realtors, and a huge number of average realtors to choose from. Let’s cover what a buyer’s agent will do for you, according to website Realtor.com, the website which has an agreement with the National Association of Realtors;

1. Protect their client’s financial information – Not sure what this exactly means, but DO NOT give your financial information to your realtor.  Your financial information should only be provided to your mortgage broker.  They can give you a pre-approval letter to be used when purchasing.
2. Negotiate the best possible price for the buyer – Your buyer’s agent only gets paid when you purchase the property.  Therefore their financial interest is to get you purchasing a property for the least work possible (if you are buying a $200k home, then they get paid the same, no matter whether you purchase the first home you see, or the 500th).  The freakonomics guys covered this in detail for the seller’s agent.  The theory for buyer’s agent is even stronger, since a buyer’s agent spends a lot more time showing you properties.   Therefore, when you are negotiating on a property, is your agent getting you the best price and prepared to walk away, or just trying to get the deal closed?
3. Must disclose to the buyer if they are working with another buyer interested in the same property – Great, they can let us know if they have a conflict of interest.  Not an issue if you don’t use them in the first place.
4. Show all properties the buyer is interested in that fits their criteria and budget – In my experience, this is not the case.  I was selling a condo in a hot market, and listed the property on Zillow and Trulia (2 of the most popular real estate search sites).  I got no serious interest in 3 months.  I then paid a flat fee realtor to list the property on the MLS.  I was flooded with offers within a week.  The realtors were clearly blacklisting my For Sale By Owner listing.  Your buyer’s agent will show you any property being sold by another realtor.  However try asking a buyer’s agent to see a For Sale By Owner listing you find…
5. Connect you with the service providers—inspectors, lenders, home warranty companies—to best suit your needs – This is the most useful part of having a buyer’s agent.  Remember the realtor is being paid 3% of your purchase price, so you have to ask yourself if this service is value for money.

The advantages you have in using the seller’s realtor in a transaction are as follows;

1. You can put in as many offers as you feel comfortable with – As a buyer’s agent gets paid based on the purchase price, rather than the work they put in, some buyer’s agents will discourage excessive offers.   The more offers you make, the more work they have in drawing up contracts.  If their computer skills are not great, they may even complete each contract separately (as opposed to using a template and just changing the address, dates, and offer amount).  Without a buyer’s agent, you can lowball offers to see if they stick, and put in as many offers as you feel comfortable with.  The classic buyers realtor remark “don’t offer too low or the seller may get offended” is a terrible strategy to getting the best deal.  Most sellers will still counter with what they feel comfortable with.
2. Double Commission Motivation – The seller’s realtor is getting approximately between 2.5% and 3% in the average commission in the US for selling the property.  If you end up as the buyer and use the seller’s realtor then their commission doubles.  Doubling income on a transaction can sometimes be a powerful motivator,  The seller’s realtor must be representing the seller.  Sometimes with powerful motivation, they will work as hard as possible to ensure you are the buyer.
3. You have 1 less middleman in negotiations – You can negotiate directly with the seller’s agent, who then communicates with the seller.  Having less steps in a negotiation means less information lost in translation.
4. No one to discourage you walking away – You are free to walk away from any potential purchase if the seller is unwilling to match your requested price/conditions.  With a buyer’s agent who only gets paid if you complete the purchase, you have someone involved who may pressure/coerce you into making an offer that you wouldn’t otherwise make.   Utilizing a seller’s agent in this scenario, they are pressuring/coercing the seller to accept your offer for the same reason.
5. The seller’s agent sometimes accidentally reveals crucial negotiating information – I purchased a property last year.  It was worth about $450k, and had been listed for months at $525k with no interest.  The seller dropped the price to $410k, and on that day I went to view the property.  After explaining to the agent I would be buying with him acting as dual agency,  I asked in his opinion how much should I offer.  He said that the seller had received an offer for $330k, but wouldn’t move under $360k.  Guess how much I offered…  I paid $360k, and the property appraised for $455k, I got an amazing bargain.  A seller’s agent must act in the seller’s interests, and should never reveal information such as this.  However everyone is human, and for that agent with a bonus $10k on the line if I was the buyer, let out information he shouldn’t have.
6. During a multiple offer situation, the seller’s agent will present your offer in the best light – If multiple offers are received for a property, the seller’s agent must present all to the seller.  They will generally sit with the seller and go over the differences, and can present differing positives and negatives of each offer.  If the other offers are through agents, and your offer is the only 1 through the seller’s agent, which offer gets the A+ presentation?
7. A seller’s realtor may renegotiate their commission with the seller to get the deal completed – If a property has been listed for some time, sometimes the seller’s realtor may be motivated to sell (since they want their seller’s commission portion now).  If your offer is within 3% of what the seller is looking to receive, then the agent may negotiate for their commission to be reduced to make the sale.  This ofcourse wouldn’t occur if you had a realtor, since the seller would have less commission to work with.

The money you will save through not using a seller’s realtor is in the amount you pay for the property.  These factors combined can save you thousands of dollars.

How to Purchase Without Buyer’s Agent

Now that you know why you want to purchase a home without a buyer’s agent, lets move on to how;

1) Decide where you want to live/invest.  

Pick which neighborhoods would match your budget, and any other factors you are looking for.  Sites such as Citydata can be used for neighborhood information.  Don’t be afraid of using Google too.

2) Find a mortgage broker

You will need a mortgage broker unless you are planning on paying cash for the property.  No offer for a property is worthwhile unless it has proof of funds (either cash or pre-approval from a mortgage broker).  You use either your bank’s mortgage broker (go to a branch and they will set you up with one), or an independent mortgage broker.  For quotes from a number of banks and mortgage brokers, see Lending Tree.  Read Financing an Investment property for more information on conventional mortgages.

3) Setup web alerts for properties in your area

With your neighborhoods chosen, go to online real estate web portals to setup email alerts.  The fastest site for getting MLS feeds is Redfin, however Redfin is not available for all markets.  Realtor.com is available in more markets, but is not as user friendly to utilize.  Zillow and Trulia are available in most markets.  I suggest setting searches on all web portals, so you get any property that may be listed on one site, but not another.  Your local MLS association will also have a feed, you should use google to find their website.

4) Contact sellers agents to schedule showing for their property

Contact sellers agents when you would like to see a property.  You will need to contact each seller’s agent separately.

To identify the seller’s agent, realtor.com is the best site, as they will also show the agent’s phone number as per below;

Redfin will show the buyer’s agent name and agency, but will not show their phone number.  You can use Google to find the agent’s phone number.

Zillow will also show the seller agent’s name, but not always their phone number towards the bottom of the listing.  In the example below the phone number is shown, as the agent is paying for Zillow service.  Zillow property information is covered in Real Estate Agent advertisements (Zillow’s business is selling advertising to realtors), so ensure that you

Trulia will also show the seller agent’s name, but not always their phone number towards the bottom of the listing.  In the example below the phone number is shown, as the agent is paying for Trulia service.

When you call the agent, your script should be as follows;

1. Ask to speak to the agent about property address.  Sometimes you may be talking to a receptionist at first.
2. Explain you are not a realtor, but are a buyer.  Ask if they are willing to do dual agency.   Dual  Agency means that the realtor will be representing the seller, and you the buyer (ie receiving double commission).
3. Every agent I have contacted was happy to accept double commission.  If the agent is not willing to do dual agency, then contact a Redfin agent, since they will rebate you some of the commission.
4. Schedule a time to see the property with the agent.
5. Some seller’s agents will try to get you to sign an exclusive agency agreement.  You should initially politely refuse.  Most realtors will still show you the home, with a verbal agreement that they can be duel agent.  If a seller’s agent insists you sign, then ensure that it states that the only property they represent you on, is the property you will be seeing.

Making an Offer

You have found the perfect property, the seller’s agent has showed it to you.  Now it is time to make an offer.  The states I have purchased property in, have standard real estate purchase contracts are available online.   I once tried to write my own contract (very early days of purchasing), and the horrified realtor sent it back to me wanting the offer in the standard realtor contract for my state.   Realtors are not lawyers or legal professionals, so they are only comfortable reviewing the same contract every transaction they are involved in utilizes.

The contract is long, but many areas are reasonably standard.  The major decisions you must make are;

1. How much to offer.  Use the same websites you are using to search for property, to view recent sales in the same area.  Redfin is my favorite, since they have search options for last 6 months sales records, 12 months, and all time.  Remember that an appraiser would only use the past 6 months of sales, anything old is stale.   Ensure your comparisons are similar number of bedrooms, baths, square foot (building and lot), parking, and age.
2. Amount of Earnest Money – This is a deposit you will pay to hold the property.  If you cancel the purchase within the inspection or financing contingencies, you will get this money back.  If you don’t purchase the property, but these dates have passed, the seller gets to keep your earnest money.  The seller realtor’s firm or the title company will often hold the earnest money.  As you are not using an independent buyer’s agent, have the seller realtor’s firm hold the money if they are a large established firm (ie national company brand name).  If they are smaller, request that the title company holds the earnest money.  I suggest that you pay 1% of the purchase price in earnest money, minimum of $2,000.  This shows you are serious about purchasing, but doesn’t tie up too much money if something went wrong after the contingency dates.
3. Inspection Contingency Date – This is the last date you can identify an issue with the property and cancel the deal with the seller obligated to return your earnest money.  Propose this date is 15 business days after the contract is accepted.  The seller may push back and request as little as 5 days.  I would not accept less than 10.  This is the period you can get an inspection using specialists or a generalist.  If you find issues during the inspection, you can negotiate with the seller to lower the price, fix the item, or you can cancel the purchase if you cannot come to an agreement.   If the seller is to fix the item, or lower the price, then you will need to complete an amendment to the contract.  On this amendment, be sure to extend the inspection contingency date if the seller is going to be fixing the issues, as well as defining what the seller will fix.
4. Financing Contingency Date –  This is the final date your bank can reject the mortgage.  Historically 30 days after the contract acceptance would have been enough time.  In October 2015, the government introduced new paperwork laws called TRID, which slows the financing process down.  Therefore you should set this date at 45 days after the contract acceptance.  If you start getting close to the financing contingency date and your bank still hasn’t given you a clear to close, then ask for an extension to the deadline.  Most sellers will comply, and understand bank delays can be out of your control.  Clear to Close from your bank means they are signing off on your mortgage.  You want this to occur before your financing contingency date.
5. Who pays for which closing costs – This is standardized in most US states.  The seller’s agent should be able to provide you information on the standard process for your state.  Be sure to use google to validate how the closing costs are split for your state.
6. Seller Credit – This is an amount of money that the seller will contribute to your closing costs.  Conventional primary residence mortgages can allow up to 6% of offer sales closing costs credit, and investment mortgages 2% of sales price as a closing cost credit.  I personally always put 2% seller credit, and offer 2% more than I otherwise would have.  This ends up being the same to the seller (they get 2% more which they lose as a credit for my closing costs), and means less cash I need to pay to close the property (as those funds are effectively being financed by the mortgage).  See seller credit for closing costs for detailed example.
7. Use a real estate attorney – You can hire a real estate attorney for approximately $400 – $600 to review the contract for you, and ensure all attributes of the contract will work for your circumstances.

After Offer Accepted

At the point the offer is accepted, this is when most of the realtor’s job is just advice on the process.  You will be working on inspections, and with your mortgage broker on the financing process.  Either the title company or your real estate attorney will complete the legal work (depending on your state, ie in Colorado the title company completes most of the legal tasks, in Illinois, the real estate attorneys do a lot of the legal tasks).

If you have any questions, feel free to ask the Seller’s Attorney.  They are now also representing you, and will be very happy to help out.  As they are not independent, do not rely on them for anything that could bias either you or the seller.  Most steps of the process involving a realtor once you are under contract are procedural, and your real estate attorney is the person to help look out for your interests.