Does it cost money to use a Realtor? How does commission even work?

In Texas, the homeseller usually agrees to pay the commission of the agent that is listing their home for sale as well as the commission of the agent that is representing the buyer purchasing the home.  Payments to the real estate agents on both sides are typically paid out of the proceeds of the sale.

However, it is up to the seller to decide what, if any, commission compensation they will pay to the buyer's agent.  This can be negotiated as part of the purchase contract.  In many cases the commission often amounts to roughly 3% for each agent.  

I can find homes myself using search portals like Zillow, so why should my Realtor get paid so much?

There are a few things to keep in mind here.  You're right that it's pretty easy to search for homes online yourself.  However, if that's the only way you're searching, you will miss out on a large portion of the homes for sale in Austin.  The percentage varies depending on the year and season, but Austin has a large pool of homes that are sold privately outside of the public portals or the multiple listing service (MLS) used by most Realtors.  You may hear these listings called private, off market, or private exclusives. These homes are not being actively sold or marketed on the MLS, but instead are being sold within private portals that are only accessible to Realtors.  Some of these portals have price thresholds, and others require the participating Realtors to pay substantial dues or meet eligibility criteria.  Not all Realtors are eligible or will pay the participation fees.  But it comes down to this:  if you are only looking for homes online in the public portals, you are missing a big chunk of the available housing inventory.

Beyond that, Realtors provide a lot of service behind the scenes that you may not be aware of.  Here are some examples of the work a Realtor will do for you during the course of your home purchase.

As you initially begin your home search, your Realtor will:

• Spend time learning about your wants and non-negotiable needs.
• Set up a home search that aligns with your wants and needs, and arrange for you to be alerted when new homes come to the market that meet your criteria.
• Answer your questions about the home buying process, the timeline, and what to expect along the way.
• Identify the common pain points during a real estate transaction.
  
• Explain what to look for in a home and how to assess properties.
• Provide names of potential lenders so that you can get pre-qualified for a loan, if needed, before beginning your home search in earnest.
• Provide you with a buyer's representation agreement that outlines the terms you will work together under.
  

As you begin to look at homes, a good Realtor will:

• Review and provide feedback on homes that match your search criteria, including homes only available through the private portals.
• Educate you on current real estate market conditions that could impact your purchase.
• Schedule showings and arrange property tours, including previewing homes on your behalf or conducting video tours.
• Show you a variety of homes to help you narrow down your preferred neighborhood, home style, and more.   
• Point out all known material defects in a home.
• Identify concerns for future re-sale of the home you are considering buying.
• Explain how you can check crime rates and school rankings in any of the neighborhoods you are interested in.
• Teach you what to look for in the property disclosures provided by the sellers.
• Continue to answer your questions about homes of interest, the home buying process, and relevant timelines.

As you narrow your choice and consider making an offer on a home, an experienced Realtor will:

• Check zoning and building restrictions.
• Help you decipher public property and tax information about the homes you like.
• Help you analyze the differences between the properties you are considering and identify the top choice.
• Provide you with statistics to help you arrive at an offer.  These statistics include  what percentage of the list price most sellers in the area are currently receiving, average days on market, current number of homes on the market, the absorption rate, and other factors that could impact your offer price.
• Prepare a comparative market analysis (CMA) that compares the home(s) you are considering to other recent sales.
  
• Explain the different pricing models to determine the best offer price.
• Identify other contract terms that can be adjusted to make the most appealing offer based on current market conditions.
• Point out the common contract contingencies and explain the pros and cons of each.
• Explain the terms of the sales contract. 
  
• Walk you through estimated out-of-pocket costs to complete the transaction. 
• Give you an idea of your costs of ongoing home ownership such as taxes, utilities, pool maintenance, and other carrying costs.

As you negotiate a purchase contract on a home, your Realtor will:

• Communicate with the listing agent and determine if there is any existing competition for the home.
• Prepare a draft residential sales contract for your review and approval that includes approved protective clauses where permitted.
• Explain the terms of the draft contract.
• Ensure you receive and understand all seller disclosure forms.
• Explain the potential for multiple offers and how that can be handled by the listing agent
• Submit the offer to the listing agent on your behalf and gauge the seller's interest.
• Keep you informed on responses from the sellers, and strategize with you on possible counter offers.
• Engage in ongoing negotiations on your behalf to arrive at the best price and terms.

Once you have a home under contract, a strong Realtor will:

• Guide you through the steps needed to complete your due diligence during your option period, such as a property inspection.
• Provide valuable resources as you go through the purchasing process, including quality vendors like lenders, home inspectors, tradespeople like plumbers and electricians, moving companies, interior designers, painters, locksmiths, window cleaners, handy people, and more.
• Review and discuss concerns identified in the property inspection.
• Negotiate the price or repair requests based on the property inspection. 
• Check addendums and monitor repairs to ensure agreed terms are complete.
• Monitor all timelines.

After you are past your option period and moving forward with closing on the home, your Realtor will:

• Continue to monitor timelines.
• Review the settlement statement for accuracy.
• Advise you how to analyze the settlement statement you are provided by the title company.
  
• Ensure the appraisal is ordered by the lender, and assist the buyer in interpreting the appraisal report.
• Order any surveys needed.
• Ensure the title company completes a title search.
• Review the title insurance commitment with you.
  
• Offer contact information for municipal services and utilities so that you can have the home ready for your new ownership.
• Double-check property tax, home-owner association dues, and utility prorations if relevant.
• Answer questions about flood and title insurance.
• Schedule and accompany you on a final walk through of the home shortly prior to closing.
• Confirm with the lender that the property is clear to close.
• Advise you on the risks of wire fraud.
• Ensure you have all forms and documentation on hand to complete the purchase.
• Confirm the closing date and time.
• Attend closing with you and be available for any questions.
  
• Notify you when the purchase has funded and the time you can take possession of the home.
• Be available after closing as needed to provide advice on home improvements, property tax protests, and more.

I’ll get a better deal working with the listing agent, directly, right?

Not really.  A listing agent works for the seller, and they are obligated to work in their client's best interest.  When it comes to negotiating, the listing agent will NOT have your best interest at heart.  The listing agent also has a fiduciary responsibility to the seller which means the listing agent is required to tell the seller anything they learn about your buying situation (unless you and the seller sign a dual agency agreement which basically makes the listing agent a messenger between the two parties). Simply put, if you work with the listing agent directly, you have no representation or advocate in your corner.

What are the upfront costs of buying a home? 

While you are probably expecting to pay a mortgage once you've purchased a home, you will also incur some costs as part of the purchase. Those costs most commonly include:

EARNEST MONEY: Earnest money is a type of security deposit that homebuyers submit whenever a real estate contract is executed to demonstrate they are serious and sincere about completing the transaction. The earnest money serves as the seller’s default remedy if you breach the contract. 

In Austin, most homebuyers put 1% of the sales price down as earnest money. That means if you’re buying a $500,000 house, you would put $5,000 down as earnest money. In a competitive market, many buyers decide to increase the amount of earnest money to make their offer more attractive to the seller.

The earnest money is paid to the title company where it is cashed and deposited into an escrow account and held on the seller’s behalf. When the purchase of the home is complete and the transaction is closed, the earnest money is credited toward the final sales price. It is applied as deposit toward the final purchase price of the home. If, for some reason, you decide not to proceed with the purchase of the home during your “option period,” your earnest money will be refunded.

OPTION MONEY: After you execute a real estate contract to purchase a home (meaning all of the terms are agreed upon and all parties have signed the contract), you typically begin an “option period.” The option period is a span of time in which the homebuyer has an unrestricted right to terminate the contract for any reason so long as proper and timely notice is provided to the seller. As the homebuyer this is your opportunity to conduct any due diligence necessary before moving forward with the home purchase. During this period -- often 7 to 10 days -- we commonly have the home inspected (see below) to determine if there are any underlying issues (roofing, plumbing, electric, etc.) that could affect the price of the home.  

Because the seller takes a risk by changing the status of his or her home to “pending” or “under contract,” homebuyers often compensate the seller by paying for the “option” to terminate the contract. This is a way of showing good faith to the homeseller. You are buying an option to terminate the contract for any reason.

The cost and length of the option period may vary, as it is one of the key negotiable terms of the real estate contract. In a competitive real estate market, we sometimes increase the amount of the option fee and/or decrease the length of the option period to make your offer to purchase the home more attractive to the seller.

Here in Austin the option fee usually ranges from $100 up to $5,000 depending on the cost of the home you are purchasing or strategic negotiation reasons. Because it serves as a type of deposit to secure the contract with the seller, the option fee is not refundable if you choose to terminate the contract during your option period. If, however, you proceed with the purchase, the option fee is applied toward the final sales price of the home.

INSPECTION COSTS:  Before your home purchase is finalized, we advise our clients to pay to have the home inspected by a licensed home inspector. The inspector will review the condition of the house and the primary structural and mechanical systems. Inspection costs vary based on the size of the home and the services the inspector is providing. For a standard inspection of a single family home in Austin a buyer should budget $500 - $1,000.

Of course, other inspections require additional fees. Depending on the age, construction, or special features of the home, we may recommend additional, specialized inspections. For example, older Central Austin homes may have cast iron plumbing, so we often recommend a static plumbing test to check the integrity of the system. Swimming pools, foundation, and stucco are other special inspections that might be appropriate depending on the home. Conducting this additional due diligence for a larger home can cost as much as $2500.

LENDER COSTS & FEES: As part of processing your loan to purchase the property, the lender incurs fees that they often pass on to you as part of your closing costs that are paid at the end of the transaction. These fees cover expenses like the appraisal, credit report, recording, legal fees, and more. You will see a detailed list of the fees you are paying as part of a "settlement statement" the lender provides to you at least three days prior to closing.

DOWNPAYMENT: This is the portion of the purchase price that you pay at closing, while the rest of the purchase price is typically paid over time through a mortgage.   We traditionally speak of down payments as percentages (5% down, 10% down, 20% down, 30% down, etc). 

The downpayment is paid at closing either via a wire or cashier’s check.  Any small adjustments at closing (for tax calculations and so forth) can be made via personal check up to $1500.

How much do I need for down payment?

It depends.  Your lender may require a different amount of down payment depending the purchase price of the home, your credit history, and other factors. There are also financial benefits to paying different downpayment percentages.   For example, putting more than 20% down is often advantageous as it helps borrowers avoid private mortgage insurance which can be quite costly.  All that said, it's common for folks to make a 5% - 20% downpayment on their home.    

What's the difference between assessed, appraised, and market value?

We get asked all the time about the different values assigned to a property, and why they often seem to be so substantially far apart! Here’s a quick rundown of the various ways of valuing a home:

MARKET VALUE:  Simply put, this is what a buyer is willing to pay for a property. A real estate professional will use their knowledge of the market as well as a comparable market analysis of recent sales of similar properties to give a range of value for a specific property; however, there is both an art and a science to this process so each real estate professional may have a different opinion of value.

APPRAISED VALUE:  An appraisal takes place if there is financing being obtained on a home (or some other situation arises, such as for estate/probate purposes). Basically, a lender wants to be sure that the home is worth what the buyer is paying (and what they are lending), as they will be holding a mortgage on the home as collateral for their loan. Appraisers traditionally will create a radius around a property and select 5-6 comparable properties that have sold, and add or subtract value based on the finishes, overall condition, and basic specs of a property. If the appraisal is for financing purposes, it is important that the property appraises.  If it does not, the lender may deny the loan.

ASSESSED TAX VALUE: This is an assessment done for tax purposes. The county tax assessor’s office places a value on each property in the municipality each year in order to ascertain what the tax on each property should be. Often the county tax value does not align with the market value of the home.  This is because there are no laws in Texas that require the disclosure of what homes trade for.  As a result, the taxing entity is often relying on incomplete information to calculate assessed tax value.

Where do my option money and earnest money check go?

The earnest money is paid to the title company where it is cashed and held in escrow on the seller’s behalf. When the purchase of the home is complete and the transaction is closed, the earnest money is credited toward the final sales price. It is applied as deposit toward the final purchase price of the home. If, for some reason, you decide not to proceed with the purchase of the home during your “option period,” your earnest money will be refunded.

The option money is paid to the seller.  Because it serves as a type of deposit to secure the contract with the seller, the option fee is not refundable if you choose to terminate the contract during your option period. If, however, you proceed with the purchase, the option fee is applied toward the final sales price of the home.

What is a bidding war?

Current market conditions are simply a function of supply and demand.  When there is a high demand for homes but a low inventory of homes on the market, it is considered a seller's market.  In a seller's market it is common to have multiple buyers bidding on the same one property, which creates “the auction effect” – or a bidding war -- where they compete against each other to purchase the home.  A bidding war can also occur when a seller prices their home below market value, making it extremely attractive to potential buyers.  In either case, a bidding war often drives up the purchase price of the home.  

While price is often a determining factor, it’s not always the highest price that seals the deal.  Sometimes other aspects of the offer add significant value to the seller. Limiting the length of the option period, increasing the amount of the option money, or providing an opportunity for the seller to lease the property back while they secure a new home are just some of the factors that can make an offer more attractive to the homeseller.  Limiting the contingencies and lessening the risk for sellers can be key to winning the deal in a multiple offer situation.

There are no rules on how multiple offer situations are handled.  Some real estate agents negotiate the first offer that comes in, where others ask for the highest and best offer by a certain date.  We’ve developed our own thoughtful process when working with sellers where we inform all potential buyers that the house is now in a multiple offer situation.  We tell all buyers our preferred terms and invite them to bring their “highest and best” offer by a particular date. This allows us to be transparent with all parties, while also allowing the potential buyers to improve their position before the seller makes a final decision.

In a bidding war, there is often an emotional desire to “win” that may overpower your pre-determined spending limits.   Use caution and talk through the options with your real estate agent.  

Would I be better off waiting to buy once the market cools down?

With Austin home values continuing to appreciate, it can be tempting to wait for the market to slow. Certainly, there is a cycle to real estate but in the last thirty years we have only seen prices go down twice – once in the 1980s and again in the recession between 2009 – 2012.  Even then, the decrease was only 3 – 5 %.

As you think about the timing of purchasing a home, there are a couple of variables to consider:

1. Interest Rates: As interest rates rise, buying power decreases. The negative correlation of rising rates often outweighs the impact of a market slowdown. An example puts it in perspective.  Every .5% rate increase represents an additional 5.5% that you'll pay each month.  For a 30-year loan on a $500,000 home purchase with 20% down, you're looking at an additional $43,000 in mortgage payments over the term of the loan for each .5% increase in interest rate.   
2. Do you have something to sell?: If you are planning to leverage equity from a current home or need to sell before you buy, keep in mind that as the market cools down, so does the value of your investment. 

There are pros and cons to every market condition.  Talk to an experienced Realtor and mortgage professional to discuss various scenarios for your next purchase.

Is a condo or single family more liability?

It’s not necessarily a matter of “more” liability, it’s a matter of how it’s shared. With a single-family home, your homeowner’s insurance will be more expensive than a condo policy, and general maintenance and repairs are solely the owner's responsibility, so there could be more work/additional cost associated with a single family home. A condominium spreads the liability and burden of maintenance and repair costs across all of the owners, and your condo insurance policy is generally less expensive as the association’s master insurance covers a lot of the larger ticket items (roof, etc). It’s important to work with your agent and lender to understand the implications of each when deciding which is a better fit both financially and from a maintenance standpoint long term.

What do I need for a pre-approval for a home loan? 

A solid pre-approval can certainly give you the leg up on competing offers, so it’s important to be ready when it comes to working with a lender. In short, your pre-approval is the lender saying you can afford “x” after taking a quick glance at your financial situation.  In order to be best prepared for getting pre-approved, begin compiling the following items:

1. Tax returns for the past two years.
2. Pay stubs for at least three months if you have an employer or tax returns and profit and loss statements if you are self-employed. If you are changing jobs or relocating, a copy of your employment offer letter. Talk to your lender about any potential change in your employment prior to seeking pre-approval, as it may impact your ability to obtain a loan.
3. Bank statements for the past three months.
4. Other asset/income statements, such as 401k, retirement accounts, or real estate leases if you own investment property.
5. If obtaining money from a third-party like a friend or family member, you will need a "gift letter," which your lender can help you with.
6. An idea of your credit score and monthly debts – student loans, car loans, etc. will be used to calculate your debt-to-income ratio, an important factor in mortgage lending.
7. If you have a mortgage already, a couple of months of mortgage statements.  
8. If you are divorced, a copy of your divorce decree and documentation of any child support payments.  

Getting all of these items together in advance will help you and your lender be prepared. Many lenders, if given all of this information up front and authorized to pull your credit, will actually be able to pre-underwrite your loan, meaning that you will be approved as a buyer and they will simply need to “approve the home” via appraisal.  This can be a huge bonus and help you stand out in a multiple offer situation.  

Of course, getting pre-approved for a home loan comes after you've selected a lender.  The majority of lenders will have very similar rates; however, a local lender on the ground in the area you’re looking in will likely be more competitive and better-known amongst agents, which surprisingly can have an impact on the credibility and weight given to the pre-approval.  

What sellers would tell buyers if they could

Over the years we've heard the same concerns and complaints from Austin home sellers.  We've distilled it down to eight essential points.  Consider this unfiltered feedback before your home search begins in earnest.

Revenge of the Seller >>