Wednesday, December 24, 2014

Buyers Often Pay More Than They Should When Buying a Home

[Published Dec. 25, 2014, in the Jeffco editions of the Denver Post's YourHub section and in five Jefferson County weekly newspapers. Sentences in italics were not in either version.]

It’s easy to predict closing costs for sellers — basically, commissions + title insurance + closing fee + HOA fees, if any — but the closing costs for buyers, unless they are paying all cash, are far less predictable. The costs paid by buyers who finance their purchase with a mortgage can definitely add up.

There is little consistency among lenders as to the loan origination, document preparation and numerous other charges which are paid by buyers.  Most but not all of those charges are spelled out in what’s called the Good Faith Estimate (GFE) and cannot be substantially changed prior to closing.  This allows buyer to do some comparison shopping among lenders, although not many take advantage of that opportunity, trusting in a lender they’ve used before or in the lender recommended by their agent.

If you do utilize the lender recommended by your agent, note whether it is an affiliated or in-house lender.  You’ll know, because the Real Estate Commission requires your agent to present an Affiliated Business Arrangements disclosure listing all lenders, title companies and even inspection companies that are partially or fully owned by your agent’s brokerage.  

Virtually all the big brokerages have such affiliated companies and those affiliations can earn large brokerages large profits.  Agents in these brokerages are encouraged to recommend these affiliated companies to their clients and can find themselves being rewarded indirectly for doing so.  [Golden Real Estate has no affiliated business arrangements.]

Affiliated business relationships can pose a conflict of interest, however, which has not gone unnoticed by the Colorado Real Estate Commission, but so far all the commission has chosen to do is require disclosure of these relationships. The director of the Division of Real Estate has told me she is concerned about the potential conflicts and is considering recommending other measures to protect the public.

Meanwhile, if your agent does recommend an affiliated lender, simply ask the agent to provide the name of a second trusted but unaffiliated lender from whom you might get a competitive quote. That will take the form of a second Good Faith Estimate, but do also request a list of fees that may not be on the GFE. 

Regarding title insurance, the seller typically pays for the “owner’s” policy which insures that the buyer gets clear title to the property, and those premiums are pretty competitive, but the cost of the lender’s “piggy-back” policy, which you will pay, and of the closing fees associated with that policy can vary greatly, so be sure to ask about those fees and see if another title company offers lower fees.  

[Attention, sellers: The "reissue" rate on the owner's policy varies greatly among title companies.  If you bought or refinanced your house in the last six years you may be eligible for up to a 50% discount on the title insurance policy, depending on which title company you use.  This can represent a $1,000 savings or more, depending on the sale price of your home!  Shop around!]

The fee for closing services on the real estate transaction itself — as opposed to the closing of your loan — are usually split 50/50 between buyer and seller and can be as low as $100 and as high as $750.  A good website for comparison shopping title companies is www.mytitleins.com.

Even when the MLS specifies a title company for the closing, the contract your agent prepares for you can specify a different title company without shifting the cost of the owner’s title insurance policy from the seller to the buyer. Ask your buyer’s agent about this possibility. I have done this many times when representing a buyer.

Another area where buyers can pay more than they should is when the buyer’s agent inserts a “broker administrative commission” in their buyer agency agreement.  The larger brokerages in particular impose transaction fees of $200 to $400 on their agents, and the agents will matter-of-factly insert that amount in their buyer agency agreement for you to pay as "commission" at closing.  However, you can demand that your agent absorb that fee himself, and I can assure you that your agent will remove it rather than lose you as a buyer.  Typically, the word "commission" should appear nowhere on a buyer's settlement statement.  Sellers pay for both agents' commissions.

I feel bad for buyers when I see those and other unwarranted fees on settlement statements, but of course I can’t say anything about it at closing, and it’s too late then anyway.

If you have other questions about how you can save money on closing or other costs as a buyer, feel free to contact me.


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