Buying a house without a real estate agent has its perils. If you overlook something, especially at closing (when contracts are signed), it could cost you. But, if you get it right, you may be able to shave thousands of dollars off the purchase price via a reduced agent commission, and that would mean lower mortgage payments.
Why some buyers pass on using real estate agents
Last year, 13 percent of homebuyers took on the homebuying challenge solo, according to a report by the National Association of Realtors. The number is likely to grow as “iBuyer” companies, which enable people to buy and sell real estate without agents, gain steam.
Opendoor, at the forefront of this new real estate model, is seeing strong demand for an end-to-end, on-demand platform for real estate transactions online. “We’re transacting over 3,500 homes per month and recently served our 50,000th customer,” says an Opendoor spokesperson.
Buying sans agent, which is also known as being unrepresented, is also an option for people who already know the house they want to buy. It could be a neighbor’s or a family member’s house, so the usual duties of an agent may not be needed.
However, the buyer should be aware of certain protections they should have in the contract, such as financing contingencies and home inspection contingencies. These are important stipulations that real estate agents ensure are included in your contract. For experienced real estate buyers, navigating a sales contract might be easy but for regular folks this can be tricky.
“Buying a house without representation depends largely on your experience. If you’re a first-time buyer you might not want to go down that route. More and more you read about cutting out the agent, especially with blockchain technology, but there are protections in the sales contract a buyer should have,” says Michael Becker, branch manager at Sierra Pacific Mortgage. “But if you have real estate knowledge and a standard, legally binding contract that you’ve used in the past, then you could save yourself some money.”
If the buyer can negotiate with the seller’s agent, then they stand to save between 2.5 to 3 percent in commissions, which is generally half of the total commission. Even though the seller pays the commission, the buyer’s real estate agent’s commission is baked in. But, if there’s no buyer’s agent, then the buyer might be able to knock that fee off the purchase price.
So, if the buying agent’s commission would have been 3 percent on a $300,000 home, the buyer would have to pay $9,000. But without an agent, there’s room to negotiate that much off the sale price, which translates into a smaller mortgage and lower monthly payments. Of course, negotiating on a home takes skill — which is why an agent can be helpful if you’re not experienced in this arena.
“Generally, the only advantage to buying a home without a real estate agent is saving the money it would cost to pay the agent, typically about 3 percent of the purchase price,” says William P. Walzer, attorney at Davidoff Hutcher & Citron, LLP in New York. “For expensive homes, that amount isn’t trivial, and could come to tens of thousands of dollars.”
That said, buyers should be aware of the legal ramifications, especially before they sign a contract, says Leslie Tayne, founder and attorney at New York-based Tayne Law Group. Although buyers may be able to save money by sidestepping an agent, inexperienced buyers can also end up with a deal that might haunt them for years to come.
Here we look at what buyers should do to prepare for closing on a house, from bringing the right ID to hiring an attorney.
What to do before closing day
The first thing you’ll want to do is review an important document called the closing disclosure. You can request this document from your lender or closing agent up to three days before the closing date.
The closing disclosure is about five pages long and includes vital information such as loan terms, closing costs and average monthly payments.
You’ll want to compare what’s in the closing disclosure to the original loan estimate you received from your bank or other financial institution. Here’s your chance to ask questions or fix any discrepancies.
Some fees can change, however. But it’s important to know which fees can change and which ones are, by law, fixed. For example, if your interest rate isn’t locked, that can change with the market. If it is locked and any of your loan application information changes, there’s a chance the lock can be invalidated and, thus, your rate can change.
Fees that can’t change are transfer taxes and required services that you had to get from the lender. There are some fees that can change, but only up to a maximum of 10 percent, such as recording fees.
Homebuyers should also submit a request for final bills to be delivered on closing day. This will show you whether all of the seller’s outstanding bills, such as utilities, have been paid for.
Get a professional to review the paperwork
Hiring an attorney to review the documents is a smart move since so much money is up for grabs.
“An attorney will be educated in what the documents should look like and can find anything that may cause problems down the line. The requirements about having an attorney present are different in each state. But even in states like Florida, where the broker/agent can put you into contract, that contract should be reviewed,” says Tayne. “I myself have bought in Florida. I’m an attorney, very well-versed in home buying and trusted my broker immensely, and I still had an attorney review the contract and make changes for me on items that could have been problematic later on.”
Attorney fees vary, some might charge by the hour while others have a real estate package, which can cost $500 to $1,500.
What to bring on closing day
There are several things you’ll need to bring with you on the big day. To make the process as smooth as possible, have these things ready at least a day or two before, so there are no surprises on your closing day.
- Government-issued photo ID: This could be a driver’s license or a passport. A birth certificate, while government issued, doesn’t count as your photo is not on it.
- Certified or cashier’s check: By law, you should be notified of how much you owe in closing costs at least one day before. So, you’ll know how much and how many checks you’ll need to bring. Personal checks are usually not accepted forms of payment.
- Proof of homeowners’ insurance: You’ll need to bring proof that you have a policy on the day of closing that’s good for at least one year.
What documents you’ll sign
Buyers should be prepared to spend one or two hours at the closing, reviewing and signing documents. There are two sets of documents you’ll be required to sign: the agreements between you and the lender for the mortgage and the seller transferring the ownership rights.
Be sure to read everything carefully before signing to make sure you know what you’re agreeing to legally. Here’s where having an attorney or real estate agent can help ease your mind and make sure you’re not agreeing to a bad deal.
“From the mortgage application and the formal offer letter to the deed transfer and the bill of sale, handling that paperwork is never fun, but a good real estate agent can assist a homebuyer to make the process easier,” says Walzer.