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Building Your Dream Team
If you’re feeling somewhat intimidated by the complexity of home buying, join the club. It’s a lot to take in, and most of us have no sense for the steps involved until we find the home of our dreams and actually start the process. The good news is that there’s plenty of help out there for you to lean on as you go through the home-buying process. The not-so-good news is that all of this help comes with a price tag. I’m a big fan of the DIY approach in many cases, but before we get into that cash-saving idea, let’s look at building a team that can help ease your load.
One could argue that this is the only nonreplaceable position on your team. Lawyers are clearly the MVP of most home-buying squads (unlike Realtors who take all the glory and puts their faces on bus benches). Your lawyer has a lot of responsibility and if you choose to take the field without a real estate agent, they will be even more valuable to you. Choose this franchise player wisely. They can save you a lot of headaches down the road. The best part about having a lawyer work for you is that, even though they aren’t cheap, they don’t work on commission. We’ll explain why this is important when we get to real estate agents in a moment. For the time being, just think about paying $2,000-$3,000 for a great lawyer as opposed to 3% of a home’s purchase price. There can be a big difference between a flat-fee and a variable commission. Your lawyer will make sure the property you want to buy is in good legal standing and doesn’t have any liens, penalties, clean-up orders, or other complications. The most important thing your lawyer should do for you is review all contracts before you sign them and answer any questions you might have. As a buyer, this is especially important when it comes to the OTP. If that document is accepted by the seller, the process is done and nothing more must be added unless both parties agree. Your lawyer will also explain and handle the actual transaction of money during the escrow period. If you choose not to go with a real estate agent, the lawyer can also handle some of the agent’s responsibilities. When choosing a lawyer, try to find one that specializes in real estate transactions. Finding a specialist can save you on legal fees and ensure you get the best advice.
This teammate will ake sure your mortgage is in place prior to all of the other razzle-dazzle stuff. Remember when we talked about getting pre-approved? That’s what these guys are going to do, among other things. In addition, the lender will work with your lawyer to transfer the mortgage loan money in order to actually complete the transaction. A lender could be any bank, credit union trust, insurance company or wholesale mortgage provider.
If you don’t want to deal with lenders one-on-one, a mortgage broker can help negotiate a good deal on your behalf. Mortgage brokers can give advice on which mortgage fits your needs best, and often provide access to lower unpublished rates. That said, there is some controversy over whether using a mortgage broker is ultimately in a person’s best interests. That’s because their pay comes from a lender’s commission. Moreover, there are sometimes vague financial incentives earned by brokers to funnel clients to specific lenders. In the last few years, online mortgage brokers and rate comparison sites have sprouted up to add transparency to the financing game. They are a growing force when it comes to comparing mortgage rates and providing quotes.
Realtor/Real Estate Agent/Real Estate Salesperson
Before I get into helping you navigate this labyrinth of terminology and hidden costs, I need to be upfront with my biases. I’m really not a fan of the current real estate business model in Canada. I think it’s ridiculous that we still work on a commission-based system. (Does a real estate agent work twice as hard to sell a $500,000 house as they do a $250,000 house? No? Well, why do they get paid twice as much?) This is a heated debate that I’ll delve into a little more at the end of this chapter, but I wanted to be clear about my stance from the get-go. If you tell someone you are looking to purchase a home, they will likely ask you who your real estate agent is. This term is rife with misconceptions and technicalities. The term “real estate agent” refers to someone who is licensed to deal in real estate. It is a basic qualifier when it comes to real estate transactions. But it is not a great descriptor – despite its widespread use. Confused yet? Stay with me. The term “real estate agent” is usually referring to someone who works on behalf of a real estate broker. They are also sometimes referred to as “real estate salespeople”, which is probably the most accurate job title of the bunch. Now, just to make things even more confusing, the term “Realtor” (that is often used interchangeably with real estate agent and real estate salesperson) is a trademarked term that denotes an individual that has met certain levels of education and has agreed to a specific set of professional standards. All Realtors are real estate agents, but no all real estate agents are Realtors. Realtors are most notable for the fact that they can list properties on the Multiple Listings Service (MLS). This is quite an advantage if you’re selling a house. To make a long story short still pretty long, your real estate agent/Realtor/real estate salesperson/ real estate broker exists to help smooth out all the technicalities involved in a real estate transaction. In the buyer’s case, they give advice on properties that best fit the buyer’s stated needs. Agents can also coordinate between the other members of your team, recommend professionals to fill the other roles, make phone calls on your behalf, and make sure all documentation is completed properly. In exchange for those services, enlisting the help of one of these individuals will usually cost the buyer 2.5-3% of the value of the home they are buying. Many people will immediately claim this is not true and that the seller pays the cost of the commissions for both the buyer’s agent and the seller’s agent. Well, here’s the deal – both camps aren’t technically wrong. No money comes directly out of the buyer’s pocket to pay an agent, BUT the total commission paid to the seller’s agent (if they use one) is then divided between the two agents. Guess who pays for that commission? The person that is buying the house pays the price, and then the seller hands over the commission percentage. So you tell me who is actually paying. All I know is that if I buy a house without using an agent, I’m asking for a 3% reduction in the price. We have a great article here that discusses this commission terminology debate. It’s one of the most popular on our site. Skip to the end of this chapter for more on the DIY approach vs. using an agent.
You need to get your house insurance in place before you get the keys. That’s where these folks come in. They’ll explain the various types of scenarios that you need to be insured for, and work with you to find a package that fits your needs. The insurance broker’s costs are almost always included in the insurance they provide.
As a buyer, you can’t put enough emphasis on this position. While you don’t technically need a home inspector in some cases, it’s my opinion that one can never be too careful when making such a large and important purchase. Check around, get references, make sure you get someone who is knowledgeable and professional – not someone who is simply there to sign off and collect a quick cheque. Unless you’re a construction expert, this member of your team will be your eyes and ears when it comes to looking at the most important stuff (no, not the granite countertops and walk-in closets). I’m talking about whether the foundation is stable, what (if any) repairs need to be done, and if there were problems in the past. A home inspector conducts a visual inspection where they walk through the house and take a look at everything from plumbing and electrical, to looking at what problems the drainage pattern of a property could present. A real professional will even be able to give you an educated guess on when certain parts of a building will likely need to be replaced. Often, homebuyers fall in love with a new paint job and hardwood floors right away (I love new paint jobs and hardwood floors too – no worries!). Unfortunately, their souls are sometimes crushed when they find out that $30,000 in repairs are needed just to keep the basement from collapsing, or to keep water from pouring in during the next heavy rain. A decent home inspection should cost around $500, depending on your region, and it’s worth every penny.
As one might expect, an appraiser appraises the value of a property (a.k.a. tells you what it’s worth). You might want this for your own benefit – but comparing on the internet can sometimes give you very similar results. In practice, your lender may actually require you to have a property appraised before completing your mortgage. The appraiser will carefully examine all of the home’s characteristics before comparing it to other recent sales in your area. Appraisals range from $250 to $500 or more for outlying areas or unique properties.
You may not need a land surveyor, but if the property does not have a current survey, you will generally need title insurance to make the purchase. A land survey will carefully document exactly hat the physical dimensions of the property are and where the property lines are relative to other land and highways. They are done when a property is initially purchased and a home built, but re often lost. In combination with title insurance, a land survey can protect you against misunderstandings and disagreements such as who owns the property that a fence is on, or if your driveway is completely on your land. Land surveys vary depending on the complexity of the property, but should range in the $500 - $2,000 territory.
DIY vs. Paid Professional
In many cases the number of positions on your team that need to be filled aren’t decided by you. Oftentimes your lender will decide if a home inspection, land survey, or appraisal needs to be done. The position that is most expensive, however, is purely optional: your real estate agent/real estate salesperson/Realtor (hereby referred to as “agent” for simplicity’s sake). So, if you didn’t click through to our article on how real estate commissions are calculated and how your agent gets paid, here’s the short and sweet. You can negotiate a flat fee for your agent’s time (a good idea in my books) or you can pay a commission. The average commission that is usually split between the seller’s agent and the buyer’s agent is 5-6%. That’s a lot of money! I often wonder if most people understand just how much money that is. On a $300,000 home, 6% is $18,000. If half of that share is yours, how many hours do you have work to earn $9,000 in after-tax income?! The services you receive had better be excellent in order to get that level of value. For me, that level of service doesn’t exist, but everyone values time and expertise differently. Most of the time the decision on whether or not to use an agent happens on the other side of the home-buying transaction. You’ll find a lot of articles talking about saving money by not using an agent when you sell a home. There are now many different levels of service and value propositions available if you wish to do some of the work of selling your home yourself. There isn’t much out there on using an agent to buy your home though. This is the result of the misunderstanding we talked about earlier, with respect to who pays for what when someone buys a house. This debate often leaves both myself and the person that disagrees with me quite frustrated. Once again, all I know is this: if I’m not paying an agent, I’m getting that house for 2.5%-3% cheaper every time. If you’re thinking about using an agent to sell a home, I suggest you read the chapter of the bestseller Freakonomics that talks about the incentives that agents have for selling your home. **Spoiler Alert** - they’re not getting you the same value as they get themselves! The authors of that book have no “dog in the fight” when it comes to selling your house. They don’t have any interest one way or the other, so why would they present such a compelling case against agents? Subsequent studies have confirmed their conclusions. Agents have a huge incentive to convince you, the buyer, to make a quick purchase. I’m not saying agents are bad people, I (like Freakonomics authors Dubner and Levitt) am saying that agents are human. If you give a group of people a large financial incentive to get a deal done quickly, on average that deal will get done more quickly. Depending on what buttons they want to push, agents can create a sense of urgency for a buyer that doesn’t necessarily exist. This is especially true when the same agency/broker is handling the transaction on behalf of the buyer and the seller. Think about how much of an incentive there is to get a deal done when you get to make profit on both sides of the equation! To be brutally honest, I didn’t use an agent when I purchased a home and I fully plan on never using one. Yes, agents can provide good advice and smooth out any potential problems with the transaction. For some people, that can be worth thousands of dollars. For me, it’s not. I have my lawyer to make sure all the paper work is completed correctly, my home inspector to make sure the house is in good shape, my Googlefu skills to determine what my purchase price should be, and my own best interests at heart to guarantee I negotiate correctly. That’s worth 3% for me. In order to put some limits on my biases, I will allow that it might not be worth it for you. Download this chapter, along with the rest of our FREE eBook now!