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Homebuyer: Watch Your Back

When one man went through the homebuying process, he realized that some of the professionals he thought were his advocates actually had clandestine conflicts of interest.

  • Tip #1 – Understand real estate agency relationships.
  • Tip #2 – Be skeptical.
  • Tip #3 – Know you’re in the driver’s seat.
  • Tip #4 – Educate yourself.
  • Tip #5 – Don’t get paranoid.
  • A New Home

Duncan Hood decided that he wanted to buy a house in Toronto, so he signed on with three real estate parties: an agent, a mortgage broker, and an attorney. He was dismayed to realize as the home search progressed that some of the individuals he was paying to help him were actually also getting paid by a third party.

He offers a few pointers based on his own experiences searching for a new home in fall 2014.

Tip #1 – Understand real estate agency relationships.

What is the difference between a subagent, a disclosed dual agent, a designated agent, a transaction broker, a buyer’s representative, and a seller’s representative? You need to understand not just the roles that are played but who is paying your mortgage broker, agent, and attorney – which in turn tells you where their allegiances lie.

Hood thought that he was the exclusive client of the agent, that it was a straightforward one-on-one relationship. “[B]ut it turns out she gets paid by the seller of the house, splitting a 5% commission with the seller’s agent,” he explains. “My mortgage broker wasn’t paid by me either, but by the financial institution that provided my mortgage.”

Even his attorney recommended a service based more on lining his own pockets than dispensing real expert advice – as discussed below.

(Your first step to cram on agency relationships is the Realtor Magazine brief on agency relationships.)

Tip #2 – Be skeptical.

You don’t want to ever confuse yourself into believing someone is looking out 100% for you when they have other relationships that are also impacting the way they behave. Hood notes that he hired an agent to help him get the price on the house as low as possible, but he later realized that his agent would make more money the higher the sale price.

He also found out that his mortgage broker would collect a commission from the firm providing the home loan, which would also be greater if he got Hood to agree to a higher interest rate. “To me that’s a stunning conflict of interest,” says Hood, “and it wasn’t revealed until I signed the mortgage papers.”

Tip #3 – Know you’re in the driver’s seat.

Now keep in mind, the agent will get zero dollars if you decide against buying. If you feel like the service is problematic, you can and should end your relationship with them.

Since brokerages don’t want that to happen, they will give you a contract called a buyer representation agreement that’s required to work with them. However, you can tell them that you’ll only sign for a certain length of time. Also, agents will generally terminate their contract with you if it’s obvious you aren’t going to do business.

Tip #4 – Educate yourself.

Homeownership has certainly changed in one critical way between a couple generations ago and today. Back then, “folks lived in their homes 15 or 20 years, or more,” explains housing market data portal HomeInsight. “Many paid off their mortgages and stayed in their homes well into their retirement.” Now, on the other hand, the typical person moves almost a dozen times (11.7) throughout their lives. Ownership of a specific house is now short-term, lasting six years on average.

Since these transitions are so much more common, it’s a wise investment to pick up some of the information that is considered the specialty of agents, brokers, and attorneys so that no one can exploit you. For instance, Hood used his understanding of the title insurance market to find a better policy than what his lawyer suggested, the latter of which paid a commission.

Tip #5 –  Don’t get paranoid.

One must be careful, but don’t get paranoid. After all, agents are highly dependent on referrals, so they want you to be happy. Despite his concerns and warnings, Hood saved well over $30,000 thanks to cogent advice from his own realtor.

Plus, “after some prodding, I got a good rate on my five-year fixed mortgage from my broker too (2.79%),” he recounts, “and even my lawyer came through.”

The fact is that even if the professional relationships of realty aren’t always working in your best interests, the average person needs that expert guidance. It can obviously be valuable too, as indicated by the tens of thousands Hood kept in his pocket.

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