Buying a house without a Realtor / real estate agent
First off, why bother?
This is the first thing listing agents tell you when you're looking at houses. It's an intimidating statement they like to use every time they meet you: If you're not the one paying the commission, why bother buying a house without an agent? It's almost an insulting question, and the answers below allow you to see right through them:
There are MANY reasons! All of them are a good thing:
- It saves the sellers money, making your bid more attractive:
- This ONLY applies states that do not allow "double agents" (such as states like Massachusetts and New York and others). In Texas, the seller's agent cannot be a double agent. If you don't have an agent, then the seller's agent only gets their standard 3%. That allows the seller to pay 3% instead of 6% of the selling price. That is a LOT of money that the seller gets to keep in their pocket. Barring any other issues with your bid, if your bid is more or less similarly competitive with other bids, the fact that they get to save money will almost always break the tie and make you the right choice for the seller.
- This is a smoke test for shaking down the Seller's agent and the quality of the home:
- 50% of the time, if you call the seller's agent they will pickup the phone and 50% of the time, they will not. The real estate agent community is not all the same. By picking up the phone and answering your questions, you get an immediate sense of whether not the Seller's agent is reasonable and friendly. If they blow you off (which happens a lot), that is a RED FLAG. That speaks volumes about how much the agent cares about the sellers, their representation, and it means that if the sellers don't know the agent behaves this way that they likely don't care that much about their own home either or are in a rush to leave, which is still a RED FLAG. Quality sellers agent's know that it's in the seller's best interest to work with self-represented buyers, but because it requires more communication with YOU, and because of that extra hour of time spent by the seller's agent (big whoop), it sometimes breeds money-hungry agents whose only goal in life is to squeeze as many transactions into as little time as possible. These kinds of agents will do everything possible to machine-gun-flip their clients and they will nearly always do this at the expense of their own sellers. If you meet a seller like this (or you don't because they don't return your call), then just ignore the home and run away. You don't want that house. Even it was your dream house, step away from the house and move on.
- Using an agent shields you from learning about the market:
- Buying a house is the biggest investment you'll likely make in your life. It's not to be taken lightly. And if you're gonna pour your savings into something that's this big of a deal, you damn well better make sure you know what the market looks like --- especially in a market with multiple-offer situations. An agent can both hurt you and help you in a very active market. If you're not rich, but you have the patience, an agent can inadvertently navigate you into seeing homes you would not ordinarily see if you had simply taken the time to go see homes by yourself. I saw (and drove to) literally 60+ homes that I was actually serious about over the course of 4 months. If you're not that serious about choosing a house, then this tutorial is not for you (and you might even be making a bad decision by buying a home in the first place). Just go get an agent and wash your hands of this tutorial (or keep renting).
- Reading every document you sign is extremely important:
- If you're not reading the ENTIRE contract, word-for-word, and comprehending it, then stop shopping for a house right now. Just stop. Go home and stick your head in the sand. You're making a totally irresponsible decision. If you have the time to read it (and every addendum to the contract), then there's no reason why you can't fill it out yourself either. The only alternative to not doing this is either that you're an investor or a cash buyer, in which case, this tutorial is meaningless to you.
- You might want to sell your house by yourself in the future:
- By buying a house without an agent, you learn all the steps needed to complete the process: from title company, to inspection, to survey, to mortgage, to closing. Selling a house is exactly the same, just the other way around. Same documents, same shit.
- Losing your offer more than once is important! I'm not even kidding:
- If your offer is rejected, don't be sad! It's fine. The world's not going to end. Just go find another house and do it again. Losing is actually very important, because on the first offer you make, you need to understand by how much money you're losing, and the only "legal" way to figure that out is to lose. The listing agent can't legally tell you how much the winner offered until the sale closes --- but that could be a month later, and by then you will have already made another offer. By losing, you gauge your own tolerance for how much you're willing to spend. For example, let's say you bid $2000 over the list price and lose in the same area. OK, so, well, maybe next time you should try $5000 over. And then maybe you lose again. So, you keep adjusting your comfort level until you hit a limit that you're not comfortable with anymore -- all the while keeping in mind that the houses you're bidding on are not jokes --- if you happen to win an offer early, then you better not bid on something in which you honestly wouldn't want to live. If you hit that comfort limit (and you better have one), then that tells you whether or not to stay in that area or try another area. Losing is actually very important and should not be avoided. A buyer's agent will tell you that you can save the emotional turmoil buy just using an agent, but if you did that you wouldn't have gotten the education about the market, and without that education, you might end up buying a house that you might not totally be sure about.
Second, how do you see homes by yourself without an agent and without MLS access?
- You don't! You do NOT need MLS access! You just call the listing agent =) That's not a joke.
- Wait, you can call the listing agent? Yes! That's what all those pretty signs are for sitting outside the front yard of every house that's for sale.
- Here's how you do it:
- a) Spend some time on redfin.com. Take your favourite listings and cross-reference them with zillow.com. 50% of the time the listing agent will appear, and 50% of the time the listing agent will not appear.
- b) If the listing agent is not there, drive to the house and write down the listing agent's phone number. If their email or website is printed on the sign, then write that down too. I'm not even kidding. If you seriously like the house, take your lazy butt out of your apartment, jump in the car, and visit the house. Write down everything you see on the sign. 20 to 30 percent of the time, you'll see something on the outside of the property that you didn't see in the listing which will give you pause and end up causing you to throw out the house anyway ----- so get over there and drive!
- c) Once you have the listing agent's phone number, call them and ask them to show you the house. NOTE: There are good listing agents and there are bad ones. In a very "hot" market, there are just as many bad ones as there are good ones, and some of them will just blow you off. If they blow you off, then either the Seller's don't really care about who's representing their interests or something's wrong with the house, or both. If the house is worth buying, the listing agent will happily show you the house. Otherwise, it doesn't matter how pretty you thought the house looked online, just forget about it and move on to the next one.
- d) Do NOT call listing agents if you're not actually serious about considering making an offer on the house, provided that everything checks out after you've seen the house. They're taking their precious time to show you the house, so if you're not actually ready to buy something, then just stick to open houses and don't bother anybody. Otherwise, you'll further the reputation that agentless-buyers don't know what they're doing and we want that to stop.
Third, if you're serious about the house you just saw, make an offer!
- Lookup the sales nearby (again, I prefer redfin.com for this because the have more detailed search capabilities):
- On your favorite non-MLS website, list the recent sales surrounding the house of comparable size and amenities. Compute an average and use your own judgement to insert some wiggle-room. (This is not a science. You'll get better at it). After you have an average, ask yourself: Does this price more or less jive with the list price? You don't need a buyer's agent to teach you how to do this. I've passed over a few houses because the listing agent totally got the price wrong ---- yes, they can get it wrong. It's obvious when it's wrong too --- the house stays on the market too long.
- Next, contact the listing agent by email and ask for the disclosure and survey for the home.
- In Texas, unless the house is an estate sale, the seller's are legally bound to give you a disclosure of the home that tells you what they know is wrong with the house. You're also legally required to sign it and return it with the offer itself.
- Grill the listing agent:
- So, you've pulled up in the driveway and you're walking around the house that the listing agent let you in to see. Ask questions!
- 1. Does this house have an offer deadline?
- 2. Why are the seller's selling?
- 3. Do you have the disclosure and survey ready?
- 4. Is the house rented?
- 5. Have they already received offers? (You're not asking for the details. Just if any were received yet).
Fourth: How do you make an offer --- like how do you ACTUALLY do it?
Do you just call up the listing agent and be like, "Yo, homie ---- how about this much?"
Well, no. But it's not that complicated:
- In Texas, you download an empty contract "1-4 Residential Contract Resale" from https://www.trec.state.tx.us and fill it out. Line by line. Box by box.
- You will need to request the name of the title company and the escrow agent from the listing agent in order to complete the contract. Do this by email.
- Texas is "nice" like this. The contract wording is already set in stone. You don't even need to hire an attorney if you're an expert already (but if you're reading
- this, you're likely NOT an expert). You just fill in the blanks, dot your I's and cross your T's and you're good to go.
- If you're applying for a mortgage, you also download the form "Third Party Financing Addendum" and fill it out.
- You also sign the disclosure that was given to you.
- If a copy of the house's survey (the diagram of the boundaries and configuration of the home) was not furnished to you before making the offer ---- do NOT buy the house. Just don't. It's not worth it. It's a red flag. I mean, you can --- the Seller has to generate one, which is allowed in the contract, but it delays the closing and unless the market is totally dead, just go find another house.
- Finally, if this is your first offer, take those 4 documents (contract, financing addendum, disclosure and survey), find an attorney on yelp, pay a flat-fee, and ask the attorney to review your contract. A few hundred dollar retainer goes a long way. Just pay it. Rip off the band-aid and pay it. But don't do it twice. *Definitely* do it once. You'll regret it if you don't.
- If you lose this offer, you can use this contract as a reference for your next offer. Just make sure to go through it with a fine-toothed comb, because attorneys can be expensive if you have to pay that flat-fee again. In states like New york (where I've also bought a house before), Attorneys direct the entire process. If that's the case, you don't really have a choice ---- they are legally required to be involved from the beginning as part of the closing costs.
- Send the offer by email to the listing agent ---- don't mail it. Don't fax it. If you don't email it these days, you're wasting your time.
- Ask the agent if there's a deadline for reviewing the offers they have received ---- in a multiple-offer situation, there usually is a deadline. If they don't have one, put pressure on the agent to create one. The deadline usually should be within a few days, and if not, something may be wrong with the house that you don't know about or is not listed in the disclosure. In my case, I lost a lot of offers, but I was making on average about 1 offer every week until one was successful. That's totally normal. If you're waiting more than a few days for a response to your offer, then something is wrong.
- If your offer is accepted, make sure your contract included an option's period, if your state allows for this. (New York doesn't, for example). Don't skip this. An option's period is a legal way to cancel the contract for whatever reason you want to cancel it. It should generally last no more than a week or two, cost's $100-$200 and is credited to the sales price during closing just like your earnest money check. It's priceless insurance that doesn't cost you anything unless you actually decide to cancel the contract. It is not necessary to ask the listing agent how much you should pay for the options period ---- you can just pick a number yourself. But, realistically, don't ask for a length of time that's longer than it takes to complete the inspection on your home, and don't offer more than a few hundred dollars.
Fifth: you got a return email / phone call that your offer was accepted. Now what?
Take a deep breath! That was the hardest part. And you made it. Now, if you made it this far, then you know your contract back and forth without me having to tell you:
- Drop off the initial checks to the title company in person: Your contract specifies an "earnest money" check, which is generally 1% of the sales price that is credited back to you at closing, and if you chose an option's period, that's a separate check, both of which are listed in the contract. The earnest money check has no relationship to your down payment ---- it's simply a refundable check that shows that you're "serious" about the offer you're making. Since it's creditable at closing, making a check larger than 1% doesn't really help you. Fill out these two checks, drive to the title company, and drop them off. After you drop them off, the title company should give you a final "executed" version of the contract back to you by email.
- Send that executed contract back to your attorney and have them look over it just to make sure nothing's wrong. Sometimes the title company does make mistakes ---- they are NOT attorneys.
- Schedule your home inspection ASAP. Find one on yelp, and if you call one that can't make it out before your options period ends, then SKIP them and find another one. Keep calling until you find one.
- Do not send a copy of the inspection to the listing agent unless they specifically want to see it. It's just etiquette.
- If the inspection turns up something bad, discuss it openly and honestly with the listing agent. You may have to work out a deal, change the sales price, or request repairs to be completed before closing. There's nothing wrong with negotiation. There's nothing that can particularly prepare you for this process ----- you just have to deal with bad things when they happen, and they do happen.
- If you have finished negotiating anything that was wrong with the inspection, great! Schedule your mortgage application to begin ASAP. It doesn't hurt to schedule the mortgage application before this --- as long an appraisal hasn't been scheduled yet, you're under no obligation to proceed with the mortgage. The more you get started in advance, the better.
- If you were unwilling to negotiate problems with the inspection ---- WALK AWAY FROM THE HOUSE. How do you do that? It's pretty easy actually: In Texas, you don't need an attorney. In a state like New York, you probably do. You just fill out the form "NOTICE OF BUYER'S TERMINATION OF CONTRACT". In Texas, you do not need anyone's permission to fill this out and you do not need your attorney either. You literally just print and sign this thing and walk it into the title company's office. The title company is legally required to give you your earnest money back as long as you are either within your option's period or have some other grounds to cancel the contract. It's that simple. The title company cuts a check back to you and you walk away scott free.
Lessons learned while finding a mortgage:
Finding a mortgage is hard! It's damned hard and not for the faint of heart. Doing this involves pitting lenders against each other and going out for blood. Lenders have no obligation and no incentive to give you a good interest rate, regardless how reputable they are. None, zip, zippo, zilch, nada.
- Lesson #1: Track the national average for interest rates and the property tax rate of the home you're trying to buy:
- This is step number one. NUMBER ONE. You need to know whether or not interest rates (not prices) are in a downward trend or an upward trend. If you don't know which direction the rates are going and what the current average is, then you will be way off base when getting your first interest rate quote. This is simple, public information. Go get it.
- Lesson #2: Get out a spreadsheet:
- Do not even bother submitting a lender's online application if you haven't drawn up your own spreadsheet. Sit down and put all the numbers into a spreadsheet:
- PMI (mortgage insurance, avoidable if you pay 20% down, but not always a good idea to avoid. See below point #7)
- Homeowners insurance
- Property taxes
- Typical utility costs in the area for your size home
- Any other incidentals that recur each month
- Pick an interest rate that is competitive with the national average
- 15, 20, 30 years term
- Put all of those bad babies into a spreadsheet and calculate what your expected monthly payment will look like, but DO NOT REVEAL ANY OF THIS INFORMATION TO THE LENDER.
- Do not even bother submitting a lender's online application if you haven't drawn up your own spreadsheet. Sit down and put all the numbers into a spreadsheet:
- Lesson #3: DO NOT VOLUNTEER INFORMATION TO THE LENDER: I cannot stress this enough. Did I mention that you shouldn't volunteer anything to the lender?
- Here are common phrases a lender will ask you on the phone:
- "What kind of interest rate are you looking for?": This is a non-starter. You want the best interest rate available. It's a ridiculous question. Don't even answer the question. If you start the call trying to be nice and drop an interest rate without being prompted and without having a valid quote from a previous lender, then they nearly always simply send you a quote for exactly what you just said (or higher). That's called shooting yourself in the foot. Only quote rates if you actually have a quote previously with a competitive rate in hand and you know it more or less is competitive with the national average.
- "What kind of monthly payment are you looking for?" This is an even more insidious and ridiculous question than the first question because it allows the Lender to reverse-engineer what interest rate you used in your own personal financial risk management evaluation. By answering what you put in your own personal spreadsheet's calculations, they immediately know what interest rate you "thought" was acceptable. You have to have a thick skin and simply shut the hell up in a nice way. "Sir or Ma'am, I don't think this is relevant and I simply want the best interest rate that I can get".
- Lesson #4: Do NOT buy points or prepaid interest. It's a scam and a terrible idea.
- Points are stupid. I repeat: Points are stupid. Points are a way for a Lender to make money *right now* and fool you into thinking that a lower interest rate is going to help you down the road by recovering your costs at a "break even point". There are even "break even point calculators on the internet", which are even more ridiculous. Why is it stupid? Well, mathematically speaking, a lower interest rate will always help you, but it will always take 10-15 years to recover the costs you paid up front on the points before you break even with the lower interest rate. Why is this a bad idea? Because of life. Life changes dramatically. In 5 years or 10 years, what happens when you need the cash? You break your leg? You need to buy a car? You have a death in the family? Or even worse, you have to move before you broke even on the loan? If you move, then you just paid prepaid interest for no reason whatsoever and have lost any hope of ever recovering those costs. Life simply changes too much, too fast to guarantee that points are going to help you. Don't do it. Just get a competitive rate with the national average and be happy with it. Better yet, consider how much money you would make if you took those few thousand dollars of points you may have paid and put them into a retirement account instead? You might make far more money over the longer term in some kind of retirement vehicle than you would if you tried to pay down your interest rate up front. Just don't do it. It's a scam and a fool's decision.
- Lesson #5: Ignore APRs (for well-qualified buyers).
- It's a total distraction. It's a made-up term. A lender will often tell you what an APR rate is along with the interest rate to get you to take into account the fees that go along with closing and paying your loan (such as PMI, home owners insurance, taxes, etc.) IF YOU DO NOT KNOW THE INTEREST RATE, you are making a mistake. The interest rate is the only thing that cannot change. Everything else can change. Even if you have PMI, it will eventually disappear. Even if you have homeowners, that's a fixed cost that you pay for the rest of your life. A loan is not supposed to last your entire life, and if you're expecting it to last your entire life, then you are buying a home for all the wrong reasons and should stop now. Using an APR in anyway to decide on a lender is a mistake.
- Lesson #6: Pit the lenders against each other to the death:
- You should not be afraid of this. YOU SHOULD NOT BE AFRAID OF THIS. There are two kinds of lenders: commission-based and commission-free. (Both of types have to make money *somehow*, right?). What this means is that lenders that do not work on commission charge origination fees to pay their loan officers. If the Lender does not charge an origination fee, then they are in it for themselves via commission. You'll never be able to get a great interest rate if you're dealing with a non-commissioned lender that simply charges origination fees. Thus, if you can't talk to a commission-based Lender like a Vulcan master, then just hand the task to your spouse and shut up. Be quiet. Don't open your mouth. Lenders will push you and push you hard. You should be pushing back. I've worked with a Lender for an entire day trying to get a quote then only to lock in with another Lender at the last minute. That is NOT a problem. Why? Because the Lenders are in it for themselves - otherwise they don't get paid. Just because the Lender said heart-filled words and addresses you nicely doesn't mean they're not in it for themselves. They are. If neither you or your spouse can detach yourselves from the process of pitting lenders against each other, then just find yourself a nice, rosy national bank or credit union, pay the origination fee and the higher interest rate and be done with your loan. Don't enter the kitchen if you can't stand the heat.
- Lesson #7: Skipping PMI can both help or hurt you depending on the size of the loan:
- Don't be fooled into the fact that PMI is just insurance. It's profit for the lender. PMI rates vary widely because profit is rolled into the rate, even if you have the same credit profile. This last point is really counter-intuitive. If you have the money to pay 20% down and avoid PMI, why wouldn't you do it, right? Well, NOT doing it has to do with the size of the loan. The lender has an automatic system in front of them which indicates to investors and the lender how much money in interest they are going to expect to make from you over the long term. It's a fixed, break-even point that they see automatically on their end, depending on when you're expecting to pay down your loan fast enough such that PMI drops off the loan. If your down payment is too large, then the interest will go UP because they won't be able to charge you PMI. If your interest rate is too low, then they charge PMI and use part of the PMI to make up the lost revenue on the loan that would have been covered by the larger interest rate. ALWAYS GO WITH THE SMALLER INTEREST RATE, even if you start your loan with PMI. Why? Because you can always just fire off a huge payment a few months later into the loan and zap the PMI from your mortgage. Poof, gone. No more PMI and you just got the interest rate that you wanted. Just be careful: Make sure you've paid the principal down to at least 78% (not just 80%), because the mortgage servicing company that manages your loan payments later is legally obligated to cancel your PMI once it reaches 78%, regardless whether or not you the lender gave you the initial 20% option to avoid PMI when the loan started. Always start with PMI if it gives you a better rate and then pay down the loan immediately after the loan starts. If you don't know what the break even point is, then ASK the lender to tell you what is. They will be surprised that you ask but should not have a problem answering the question.
So, you finished your inspection, negotiation, and mortgage ----- go to closing!
And enjoy the house =)