How Much Home You Can Buy with $17,550 Down June 18, 2008
My purpose for this post is to hit it home what a great window of opportunity we have with FHA Jumbo 
mortgages which are only around until December 31, 2008 unless Congress passes an extension of some sort (which is a possibility-but not guaranteed).
For the remainder of this year, you can use $17,550 to buy a home priced at $585,000 using FHA Jumbo with 3% down. FHA requires the buyer to invest 3% into the transaction (which can be a qualified gift). 3% of $585,000 = $17,550. (With roughly 5% down, utilizing FHA Jumbo, you can puchase a home for $600,000). The Seller can contribute up to 6% towards closing costs and prepaids as long as the buyers 3% required investment is met. With this scenario, the Seller is contributing around $14,000. The loan amount is just under the maximum allowed FHA Jumbo for King, Snohomish and Pierce County of $567,500.
With FHA there are no income limitations and much easier on credit scoring than conventional mortgages which ding you if your score is 719 or lower. Effective January 1, 2008 2009 (as things currently stand) the FHA loan limit will be reduced to their actual loan limit of $362,790 for King, Snohomish and Pierce Counties.
Of course, you’re not limited to FHA if you only have around $17,550. There’s also Fannie Mae Flex (someone please knock on wood fast before Fannie shelves decides to put this product on the shelf) which allows lower down payment–currently as low as 97%. However the highest loan amount allowed is the true conforming of $417,000. Utilizing a Fannie Flex program, you could purchase a home priced around $434,000 with the seller contributing about $12,000 towards your closing costs and prepaids.
So we’re talking $585,000 sales price using FHA Jumbo (while supplies last!) or $434,000 with Fannie Flex97 (while this product is still available) if you have $17,550 for a down payment. Can you see why I’m so crazy about FHA Jumbo? This is a window of opportunity for those who qualify for the payment but may be shy on the down payment that’s scheduled to close on December 31, 2008.
Stay tuned for my follow post on Seller Contributions and Buydowns, thanks to Leanne! 
Not showing a less-than-3% SOC commission? That’s unethical and illegal June 11, 2008
This is not legal advice. For legal advice, consult an attorney directly, not a blog.
It’s common knowledge (based on those comments, at least) that some buyer’s agents will not show properties with an SOC of less than 3%. Is that a problem? In a word, Yes.
First, the ethics: The term “ethics” in this context refers to the code of conduct by which a professional is expected to perform his or her duties. “Ethics” in this sense usually — but not always — correlates with what a layperson would consider “right” and “wrong.” Generally speaking, “ethics” in the professional sense imposes an obligation to perform a professional duty in a fair and reasonable matter.
Admittedly, I am not up to speed on the rules of ethics that would apply to a real estate agent. Many agents are also Realtors, and I know that they are thus subject to a particular code of ethics. Attorneys are subject by law to the Rules of Professional Conduct, rules of ethics formulated by the State Supreme Court. I am unaware of any similar rules that apply to agents.
With that disclaimer, it certainly seems like this conduct SHOULD be considered unethical. Surely an agent has an ethical duty to diligently work for the client, including the identification and showing of any property that is or may be suitable for the client. From an ethical perspective, I would even argue that this applies to properties with no SOC whatsoever. Admittedly, in that circumstance, the agent has every right to and should discuss this with the client, as the agent need not work for free. Thus, the agent should, either at the initiation of the representation or when the issue arises, discuss with the client whether and how the agent will be compensated if the agent finds a house that does not offer an SOC. The parties may agree that, in that instance, the client does not expect and has no right to receive information from the agent about that property. Regardless, with this conversation, whatever its outcome, the client can knowingly consent to any limited scope of representation, and consent is the key when dealing with an ethical issue.
Now, the legality: This conduct is almost certainly illegal (at least where there is something more than a 0% SOC), but there is very little chance that it will give rise to liability. How is it illegal? RCW 18.86.050 is the relevant statute. It requires a buyer’s agent to “make a good faith and continuous effort to find a property for the buyer,” except that the agent need not “show properties as to which there is no written agreement to pay compensation to the buyer’s agent.” In addition, the agent is relieved of this obligation entirely IF the buyer agrees otherwise in writing after receiving the required “Laws of Agency” pamphlet. So, assuming the property offers a commission in some amount (i.e., greater than zero), I believe the agent has a legal duty to bring that property to the client’s attention.
So why no liability if the agent fails to do so? That turns on general legal principles applicable to wrongful conduct. Where such conduct causes an injury, the wrongdoer is liable for the harm caused. Here, assume an agent fails to show a “dream house” to the client because of a 2% SOC. The client subsequently buys another house for the same price. The client then finds out that he was denied an opportunity to buy his dream house because his agent did not tell him about it. What is the injury? Given that they are the same price, there is no way to quantify the client’s injury. Under those circumstances, it will be difficult to find the agent liable. Note, however, that if the house actually purchased cost MORE than the dream house, the client may be able to recover the difference.
From a practical perspective, too, there is little chance of the agent being held liable. The whole claim turns on what the client did not know. So, in order to even raise the claim, the client has to learn that his agent failed to inform him of his dream house. Needless to say, it is hard to even fathom a situation where the client would learn of this information after the fact.
So, it ends up being one of those unfortunate facts of life where — as of today, given the laws as they exist — there is no real remedy for the injured party. Unethical? Yes. Illegal? Probably? Any way to stop the behavior? Unfortunately, probably not.
Upcoming Changes with FHA Mortgages June 10, 2008
I was just reading Brian Montgomery’s speech from yesterday which reminded me of what’s on the horizon with FHA insured mortgages. He points out that the increased loan limits are temporary–you only have until the end of this year to take advantage of the increased loan limits and then *poof* this coach turns back into a pumpkin! Instead of doing 3% down with a loan amount up to $567,500, if you’re buying in King County, the maximum loan amount for a single family dwelling will be $362,790. This is really a window of opportunity that is closing (this window includes conforming jumbo, too). I suspect that Congress will pass an extension to the loan limits…and IF they do, they may reduce the loan limit to somewhere between what is offered now to what the real loan limit is…this is a big IF. For now, we just know that FHA-Jumbo (and conforming jumbo) are here until December 31, 2008.
Next month, FHA will start their risk based pricing for mortgage insurance. This from Ken Harney’s recent article:
On 30-year mortgages with down payments of 10% or more, applicants with FICO scores above 680 will qualify for the lowest premiums — 1.25% of the loan amount upfront and annual renewal premium payments of 0.5%. Borrowers with down payments of less than 5% and poor credit scores — FICOs ranging from 500 to 559 — will be charged premiums of 2.25% up front and 0.55% annually. All borrowers will continue to receive the same market-based interest rate. Under the current system, borrowers pay uniform 1.5% premiums upfront and 0.5% annually.
The difference in savings is not super significant for borrowers. Using a loan amount of $360,000 and a rate of 6.5%, here’s how it pencils out for the credit scores above 680, 680-560 and 560 and below (who may have a tough time finding a lender regardless of FHA being willing to insure them. Lenders have their own underwriting “over-lays”).
- 680 plus with 10% down = upfront mi of 1.25% = $4,500. $4500 plus $360,000 = $364,500. Principal and interest = $2,303.89. Monthly mortgage insurance @ 0.5% of the base loan amount = $1,800 divided by 12 months = $150. $2,303.89 plus $150 = $2,453.90 (not including taxes and insurance) for the “preferred” FHA borrower.
- Credit scores above 560 with less than 10% down (this is the current model) = upfront mi of 1.5% = $5,400. $5400 plus $360k = $365,400. Principal and interest = $2,309.58. Mortgage insurance is the same rate as above, so the payment (not including taxes and insurance) is $2,459.58. A difference of just over $5 based on this loan amount.
- Credit score below 560 is going to have a different interest rate. In fact, many lenders will not do FHA loans under 580. Assuming a 559 credit score finds a lender, the upfront mi increases to 2.25% of the loan amount: $8,100 based on our example. The rate would be significantly higher in addition to the increased mortgage insurance costs.
So, the moral of the story is that if you have credit scores 680 or better and 10% down, don’t wait until next month to take advantage of the improved mi pricing. It’s not going to pencil out to the consumer as much as it will to FHA. You’ll potentially lose any gain by the rising mortgage interest rates (which have gone up again today).
Watch out for Down Payment Assitance Programs which are on the endangered species list. Even President Bush is on the bandwagon to do way with DAPS. Quite frankly, I’ve never been a huge fan as I’ve witnessed sales prices being jacked up to absorb the cost the seller has to contribute to participate and structure the transaction…who does this impact? The buyer. The practice of increasing a sales price over the list price, like the do-do bird, probably wouldn’t fly in today’s market anyhow. Home buyers utilizing FHA should count on investing 3% into the transaction (which can be a gift) and the seller can contribute up to 6%. I do believe the down payment assistance programs days are numbered.
I do hope that more people take advantage of the FHA Jumbo loans while they’re available for the remainder of this year. As I’ve mentioned, they’re a great resource for people with less than 20% down and with Fannie Mae’s DU 7.0, I’m sure we’re going to be seeing more and more FHA financing. Keep in mind that various lenders may have their own guidelines (3% vs 5% down w/FHA Jumbos, for example) in addition to those of FHA.
Fishing season is officially open! June 4, 2008
To this title you might ask, “which salmon is available?” Well, I’m not really talking about fish with scales and fins here. What we’ve noticed over the past month is that the fishing with low offers is getting pretty common in a lot of price ranges. These occurred in neighborhoods ranging all over the area too including Greenwood, Phinney Ridge (x2), Bellevue (Bridle Trails), and Mercer Island.
Some of these properties I can understand the desire of investors to lowball and get a bargain. One of these homes I had listed was already priced to be a good value for the neighborhood so my clients completely ignored some extremely low all cash offers from an investor because they weren’t THAT motivated to sell - meaning, we’d only been on market for about 30 days. Now, 2 years ago being on market that period of time would have made some people nervous but, realistically, most homes take longer than just a few hours to sell or even just a couple of weeks. So, we ignored the first 2 ridiculous offers and another one came along (still low). We put forward a counter with a very small price change and the buyers took it. WAKE UP CALL! We’re not in a buyer’s market in the Puget Sound region. We’re in a balanced market.
What I’ve noticed in talking with all of the agents submitting offers for these various listings I have is that they’ve all bought into their client’s mindset of thinking that “it’s a buyer’s market” and they should be able to really drop prices via their offers. But the agents aren’t helping their clients by doing the work associated with helping “sell” those offers.
Yes, there are some sellers out there that are still hanging on and desperately wishing for the days of the high flying markets we had for 5+ years, but reality is kicking in for most and the scales are becoming more balanced. This isn’t the rust belt where the economy has sunk and houses have sunk lower. If you’re a listing agent you had better be able to justify your pricing. And, if you’re a buyer’s agent you should do the same for your offer. One lowball offer we received my partner went back and asked the guy to submit his comps that supported the offer. The agent’s reply was, “well, I don’t have any, it’s just what they wanted to offer.” Our client almost completely ignored their offer except for some details we pointed out that led us to believe they’d accept a counteroffer with a minor price change - and it worked.
Another listing had an agent providing comps but they just solidified my client’s view that our pricing was right on. We did go ahead and submit a counter with a faster closing date and some small concessions that we expect will be accepted.
I will admit though that with a couple of my buyer clients, who are not in a hurry to buy, we’re doing some of this offer roulette. We submitted an offer on a MI house for about $100k less than asking price but we also put forward our pricing analysis and comps that supported the price point. The house had had several large price drops based on other agent feedback as well and it was definitely a cosmetic fixer. It might have worked out for my clients except that the house got another offer the same day - it was still a very low offer but not as low as ours so the seller started negotiating with them. But, that’s okay because my clients are willing to wait for the right deal for them. This house was going to need roughly $200-400k in updates over time so from a cost perspective the price we offered was what they were willing to spend knowing the costs they’d incur later.
Having watched the low offers come in for one of our listings my client provided the impetus for this post by saying in an email, “well, it looks like fishing season is officially open!” I’m glad that she’s got a good head on her shoulders and a good sense of humor too. These are the clients you really enjoy working with especially when you can have sensible discourse with regard to your work together, market conditions, strategy, and more.
Happy fishing! 
Get Preapproved before Memorial Day Weekend: More Changes with Fannie Mae May 20, 2008
Fannie Mae will be releasing a new guidelines for their AUS over the Memorial Day weekend of May 31, 2008: Version 7.0. Loans submitted prior to Memorial Day with an approval via Fannie Mae’s Version 5.7 will be honored. Fannie Mae is saying that there will be more Expanded Approvals (higher rates) than what we have experienced. I’m not saying that’s good or bad…just that if you’re considering a mortgage, getting approved before the Memorial Day weekend could be to your advantage. Here are just some of the changes:
Loan to values greater than 85%. Private mortgage insurance is no longer considered a “mitigating” factor for higher loan to values. The more equity in the property, the more Fannie Mae smiles upon you (this is a not a change, the pmi factor is).
“Authorized Users” on credit cards will no longer be considered. It was not uncommon for parents to add their child to their credit accounts as an “authorized user”. This may have been done so that the child could have credit available in the event of an emergency (picture a college student away from home). Once people figured out that the timely payments made by the parent (or credit payer) was benefiting the “authorized user”, it didn’t take long for some people to actually sell their credit history on that account by allowing strangers to become “authorized users”.
Debt to income ratios tighter. “In general, the updates to the maximum allowable total expense ration in DU (Desktop Underwriter aka Fannie Mae) Version 7.0 will be more conservative…”
Loan Type/Level of Risk. With Version 7.0, Fannie Mae is associating levels of risk with varios products (from lowest to highest):
- Fully amortized fixed rate mortgages
- Fully amortized 5, 7 and 10 year ARMs
- 6 month, 1 and 3 year ARMs and Fixed Rate Interest Only Mortgages
- Interest Only ARMs and balloon mortgages
Version 5.7 viewed fully amortized fixed rate, fixed period (3-10 year) ARMs as having the least amount of risk with balloon and interest only mortgages having moderate additional risk. Negative amortized mortgages were considered the riskiest…now they’re off the charts.
Condos are now considered a higher risk than single family detached. Version 7.0 views one-unit properties that are not “attached condominiums” as less risk than attached condominiums and two-unit properties. Three- and four-unit properties have a higher level of risk associated than condo and duplex properties.
Bankruptcy, mortgage delinquencies and foreclosures. A bankruptcy needs to be fully discharged and 24 months since the date filed.
If a borrowers credit report shows a mortgage that was reported 60 or more days delinquent in the last 6 months, they will receive a “refer”.
If the borrower has had a foreclosure reported within the last 5 years, they will also receive a “refer”. If the date of the foreclosure cannot be determined, if the foreclosure was filed within the last five years and has not been satisfied, the loan will be declined.
Self-employed borrowers will no longer be considered “an additional layer of risk”! Hey…I have to end this on a positive note!
Expanded Approval is being pumped up. Fannie Mae is anticipating more EA approvals. An EA approval means that the borrower’s scenario is “less than perfect” or some prefer to say “A Minus”. There are different levels of EA approvals (such as EA-1, EA-2, etc.). Expanded approval also come with higher rates than a typical conventional mortgage as it’s risk based pricing.
As Jillayne stated, guidelines will continue to tighten for a while with Fannie/Freddie and the private mortgage companies. This is again, another reason for people, professionals and consumers alike, to learn all they can about FHA which may be an option to consider over an Expanded Approval and tougher underwriting standards with conventional mortgages.
Sellers and Agents: Don’t Rule Out FHA Buyers May 19, 2008
I was just working on a finance flyer for a listing agent…something I haven’t done in years! Anyhow, the home is priced at $442,000 and she requested a 30 year and 5/1 ARM both with 20% down for scenarios…I added FHA at 3% down. The property is in King County and would qualify under the FHA Jumbo program. Until the end of the year (I suspect the “economic stimulus” loan limits will be extended beyond) Sellers have an opportunity to expose their homes to buyers beyond the normal “jumbo” or conforming market.
Here’s a comparison:
30 Year Fixed with 20% down at 5.75% (APR 5.902%). Principal and interest payment = $2,064. Cash needed to close = $88,400 plus closing costs of approx. $6,000 (the rate is priced with 1 origintation/discount point) plus prepaids. This rate requires a mid credit score of 720 or higher.
5/1 ARM-LIBOR with 20% down at 5.25% (APR 6.810%). Principal and interest payment = $1,953. Cash needed to close = $88,400 plus closing cost of approx. $2,350 (the rate is priced with zero discount/origination points) plus prepaids. This rate also requires a mid credit score of 720 or better.
FHA-JUMBO 30 Year Fixed with 3% down at 6.25% (APR 7.030%). Principal, interest and mortgage insurance = $2,850.64. Amount needed to close factoring down payment and closing costs is $20,350 plus prepaids. FHA is not credit score sensitive (yet) and buyers who are truly FHA approved have done so via a “fully documented” loan. They’re pretty darn serious!
When you compare 20% down conforming to the 3% minimum down required for FHA; it’s the difference of having approx. $100k for your down payment and closing costs to having a quarter of that. Some folks have the income (they still have to qualify with FHA) but they’re shy on that kind of savings. Maybe it’s their first house or perhaps their savings is tied into their retirement or children’s college fund. These are buyers you don’t want to rule out.
FHA Jumbos allow buyers to have a loan amount of $567,500 in King, Pierce and Snohomish Counties with as little as 3% down payment (some lenders require 5% down). With second mortgage’s evaporating and fewer “piggy back” options available, buyers who have less than 20% down where their loan amount will be over $417,000 will be considering FHA as an option. For example, sales price of $625,000 with 10% down (loan amount $562,500) would be an excellent FHA JUMBO candidate…only offering cash or conforming products will pretty much limit your buyers to those with 20% down. FHA buyers do not have to be minimum down…they can be less than 20% down or have a credit score or perhaps one of the borrowers has a mid score of 679.
I’ve written before about why Sellers should consider FHA…however with the temporary expanded loan amounts…now it’s even more compelling.
Financing an Investment Property May 12, 2008
Obtaining a mortgage for a non-owner occupied propery is much different than buying one you will reside in. For starters, qualifying is tougher and mortgage interest rates are higher as it’s a riskier transaction for the lender. Here are some quick tips to help get you started if you’re considering buying an investment property.
Plan on using at least 20% for your down payment plus closing costs. With a 25 or 30% down payment, you will receive a slightly better interest rate. Just to give you an idea, here is a sample of some current rates based on a single family dwelling with a sales price of $450,000 for a 30 year fixed mortgage and a minimum 720 credit score:
Owner Occupied with minimum 20% down: 5.75% priced with 1% origination/discount point (APR 5.904%)
Non-Owner Occupied (NOO) with 20% down: 6.375% with 1% point (APR 6.537%)
NOO with 25% down: 6.250% with 1% point (APR 6.413%)
NOO with 30% down: 6.125% with 1% point (APR 6.289%)
Of course, you can always pay more in points to have a lower rate. This is just to provide you with an apples to apples comparison.
There are two camps for qualifying for an investment property: those who are proven at managing rentals and those who are buying a rental for the first time or who have less than 2 years history. If you have less than a 2 year history, then it’s likely that you will not be able to use rent credit from the proposed purchase. Lenders allow 75% of the rent to be used for qualifying purposes. Proving you’re a financially successful landlord to the underwriter will take your last two year’s complete tax returns including the Schedule E’s. If you can qualify for the full PITI payment on the investment property along with your current PITI payment on your residence, then the underwriter may only require a regular appraisal. Otherwise, count on the appraisal costing almost twice as much as a typical appraisal for conventional financing. Fannie and Freddie also require a minimum of 6 months reserves (cash assets after closing) for NOO borrowers.
Odds and Ends
- FHA can be a great way for first time buyers to get into the investor market when they’re buying a 2-4 unit home. The buyer must occupy in one of the units and the mortgage will be treated as an “owner occupied” transaction. You will have upfront and monthly mortgage insurance and can buy with as little as 3% down payment.
- Second homes are sometimes treated as investment properties. This is really up to the underwriter. Typically if the home is located within 50 miles of the borrowers residence or if it does not make sense as a second or vacation home, the underwriter may determine that it’s an investment which means tougher underwriting and the NOO rate.
- Fannie Mae programs exist that help family members buy properties that don’t meet the second home requirements without treating it as an investment purchase (Family Opportunity Mortgage).
As always, I highly recommend that you meet with your local Mortgage Professional as soon as possible if you’re even just considering obtain a mortgage for any reason (investment property, residencial purchase or refi, vacation home, etc.).
Free Flushes? May 2, 2008
Our development company has been a certified Built Green builder for several years, and we’re always trying to find economically feasible ways to add “green” features to our new construction. “Economically feasible” to me means that while we’re willing to pay more to build in a more sustainable fashion, we’d like to be able to recover most of those extra costs in higher resale prices, or shorter market times.
So when I read about a “greywater recycling” unit, I thought we should try it. Here’s our first installation, in a stand-along townhome in Crown Hill — North Ballard:
This octopus-looking thing takes water from our two showers (the black pipe) and puts it into this 50 gallon tank. There is a water supply that fills the tank if the level gets too low. The city inspector scratched his head at this — first time he’d seen it — as did our plumber. But now that we’ve gone through it once, hopefully the next ones will be easier to install.
You can see the level of “grey” water in the picture, at about the 20 gallon level. This water is pumped back into the toilets to use for flushing. Flushing constitutes nearly 40% of domestic water usage, so in theory, this will reduce your water (and sewer) bills considerably. And it’s just “light grey” shower water, which if you avoid shaving, toothbrushing, and any other debris-generating activities (not to get too graphic), should be 98% pure domestic water and a little bit of ivory soap and shampoo. The feedback that I’ve seen from consumers is that they don’t notice that they’re flushing with anything different than normal “clean” water. So when you do flush, it’s with water that would have gone down the drain after its first use, but you’re giving it a second life.
The cost, all in, is about $4500 (it would be much more expensive to plumb into an existing house). This particular townhome is about 1750′, and is priced at $450,000 — not priced any higher than it would have been without this system, but our hope is that this is a feature that will set this unit apart from the competition. We wouldn’t be able to justify this in a $300,000 townhome (not just b/c of the price point, but the $300k unit wouldn’t have enough physical garage space to fit the tank), but we’re putting them into about a dozen other units right now in Seattle.
There are lots of green things that just can’t work in our spec houses — $40,000 solar arrays, for one. But this system gives a lot of bang for the buck, and I think our buyers will really like it.
Make Sure Your Loan is Locked April 29, 2008
I’ve been communicating with a home owner who thought their loan was locked in at a certain rate only to learn that this is not the case. Here’s their story:
Their existing ARM reset in March. In late February, they informed the LO they wanted to lock at 5.5%, no points, 30 year fixed, and close before April 1 and the LO said it was reasonable and doable. The appraisal was complete in late March with a LTV 79%. The LO did not lock in at that time. The LO presented a GFE 55 days after the application was signed and not the program that was agreed on…the LO admits he dropped the ball but cannot fix it with his bank.
That would depend on the “written lock confirmation.” If that document constitutes a binding contract, then yes the borrower would have a breach of contract claim against the party to the contract for the difference between the promised rate and the actual rate. Even if the document does not constitute a contract, the borrower might still have a negligence claim (i.e. a malpractice claim) against the LO if the LO failed to exercise a reasonable degree of skill and care in attempting to lock in at the promised rate. In either event, the borrower’s recourse would be against the LO (I think — again, I would need to see the “confirmation” to confirm in regards to the breach of contract claim).
The Commission-Based Fee Structure: it’s Bad for Buyers April 22, 2008
This post is not legal advice. For legal advice, consult an attorney in person, not a blog.
[Sorry, no links or cites here, but I think the following historical perspective is undisputed:] Originally, real estate agents (and brokers, referred to collectively in this post as “agents”) represented only the seller. The “listing” agent signed the contract with the seller that entitled the agent to a commission. This agent then informed other agents about the house now available for purchase by posting on the Multiple Listing Service. Another agent, the “selling” agent, would see the listing and show it to a potential buyer. Even though the selling agent then assisted the buyer in purchasing the property, she actually — and legally — worked for and owed a duty to the seller only. Because the “selling” agent assisted with the sale of the property, the “listing” agent would then split the commission paid upon the sale. The system made sense, as only the seller paid the commission to the listing agent, the listing agent then offered to share the commission as means of finding a buyer, and both agents eventually assisted with the sale. Indeed, some agents today still look at commissions in this light. As James Melanowski, an agent, said in a recent comment (#20):
There is one commission. I get paid x% to sell your property and with that x% I will do everything in my power to do my job. That may include paying a buyer’s agent, it may not. I may want to pay that agent y%, y-1/2%, or y+1/2% to bring that buyer to the table. The point is, x% is what you pay ME and it is to do with as I please.
Unfortunately, in this system, buyers usually mistakenly believed that “their” agent represented them in the transaction, when in fact they had no representation at all and “their” agent worked for the seller. With the evolution of consumer protections, many states revised this system. In 1996, Washington passed RCW Chapter 18.86, which by law altered this arrangement. Since then, in Washington a “buyer’s” agent owes a duty only to the buyer, regardless of the source of compensation, while a “seller’s” agent represents only the seller. Notwithstanding this new legal arrangement, the term “selling” agent is still used today by the MLS to describe a buyer’s agent(much to the chagrin of enlightened agents — right, Ardell?).
But if the buyer’s agent now represents the buyer, why is the buyer’s agent paid by the seller? This alone is enough to create a conflict of interest that could potentially impact the quality of the buyer’s representation (see RPC 1.08(f)). Furthermore, if the buyer selects her agent and works closely with the agent to find and buy a house, and the agent owes a duty only to the buyer, shouldn’t the buyer have the ability to decide how much to pay the agent? Under the current system, based on an outdated and no-longer-applicable model of representation, it is the seller — not the buyer — who ultimately determines the buyer’s agent’s compensation.
In addition, agents can and do represent both buyers and sellers. Thus, they have a vested interest in a system that promises a significant commission for both sides of the transaction. With flat fee listing and FSBO, the listing agent commission has come under increasing price pressure, and indeed it is not uncommon for listing agents to reduce their commission from the previously “standard” 3% (often times as long as the seller will also use the same agent for the following purchase, thus allowing the agent a subsequent and “full” 3% commission). The “selling” agent commission, however, is immune from such price pressure given the current business model. Indeed, as Kary Krismer, another agent, said in a comment (#31) to a recent post in reference to a buyer’s agent’s commission of 2.5%, rather than the standard 3%:
Well, it’s not that it’s a waste, but it’s not a wise decision at all. We’ll show buyers 2.5% properties, and have actually had a number of transactions in them. But there are some agents that won’t, or that subconsciously might down-talk the property.
Agents may argue that they are “entitled” — or, more accurately, earn — a full 3% given the time and efforts they invest in a sale, but that alone cannot justify this failure to show properties with a slightly lesser commission. After all, even 2.5% is a reasonable — to say the least — paycheck given the average house price (2.5% of $400k is $10,000). Thus, whether consciously or subconsciously, a signifcant number of agents fail to best serve their clients’ interests (by showing them ALL suitable properties and giving honest and accurate advice about each) simply because they won’t make as much money. While that is not absolutely wrong, at a minimum the buyer should be aware of this “limited” representation. How many buyer’s agents — who discriminate against commissions of less than the “full” 3% — have that conversation with their clients?
Finally, because the commission is a transaction cost, it stands to reason that a decrease in that cost will benefit either buyers or sellers or both (either prices remain the same with less costs and more money to the seller, or prices are reduced to reflect the reduction in costs, or both). With the current system, there is virtually no incentive to reduce this cost — or, for that matter even an ability to do so, unless the buyer is willing to forego an agent and either use another professional (say, ahem, an attorney) or self-represent.
So, the current commission-based fee structure, based on an outdated and now inapplicable model, leads to increased transaction costs (than what would be available in a truly competitive market) and a decreased quality of buyer’s representation. I’d say that’s bad for buyers.
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