Monday, April 30, 2007

Are realtors necessary?

When we bought our house in 2005, we had absolutely no idea what we were doing. As first home buyers all we knew was what we had been paying in rent, and monthly that seemed like a great amount to base our new mortgage payment on. We went to a realtor who showed us a few houses and gave us a website to look them up on our own. Once on the web, things finally started rolling into place.

The Internet is a vast resource for finding information about home ownership and mortgages. Although you often have to wade through the obvious advertisements, there is some genuine information that is written for your benefit. The real costs of buying a home are not quite so obvious to the first home buyer, when you often forget about taxes, association dues, insurance (which can vary wildly geographically), etc. Then comes the process of actually purchasing the house.

Our first job was to find a mortgage. We went to several different banks and I discovered one important thing: they're all filthy liars. After swimming through the "teaser" muck designed to bait and switch us, 2 banks were giving us the best deal in what they call a good faith estimate. What they don't tell you is that after you've had your credit run, all your income and expenses scrutinized, and negotiated back and forth about interest rates and doesn't mean anything because it all goes to another department entirely - underwriting - that has their own say. Nothing is firm until you get a HUD1 (I believe that was the document title), approved by their underwriting. The good faith estimate is, while full of useful information, about as useful contract-wise as the big banner outside the bank's front door.

It was also interesting to look back at the negotiating process now that we've been assaulted with reports on subprime loans and not-so-great loans. One broker didn't give us a decent rate, so we bailed and went with a commercial bank. They also tried to fit us into poor loans, but they weren't pushy. He mentioned "interest-only" and quoted a monthly payment. I responded with, "are you kidding me?" We insisted on 30-year fixed, with intent to refinance into a 15-year fixed and a lower rate as our income/credit improved (my wife and I were only 2-3 years out of college). They still sent us a GFA with an ARM option in addition to the one we asked for. So really, I can see why some people fell for the hype. These iffy loans were being pushed hard.

So finally we got an acceptable GFA, and our housing search continued. The Internet was again the best tool ever! We could search all kinds of houses, get detailed information on them, and compare. Our spending limit was $130k (though the bank had approved us for $150k) and in 10-15 year old suburbs. Several houses we found had good schools, downtown access, clean streets, etc. You might be wondering at this point where our realtor was.

We had to call him up to ask him to meet us at the houses to let us see them. He was the one with the keys. Once we found a house we liked, we put in an offer and it was accepted. But our negotiating wasn't done yet. You need to put a deposit down, hire inspectors, and then negotiate any repairs. If they refuse, and you don't want to buy the house because of a potential major problem, you could be out a couple thousand already. And don't forget, now that you've found your house the bank has to send everything through underwriting. Again.

Approved doesn't always mean approved. More negotiating with the bank.

If you've never bought a house before, you don't know what a headache this is. Imagine knowing nothing about cars and going into a dealership to buy talk to the salesman, but imagine trying to talk to the engineer to built the thing about the design of the engine. To a first home buyer, a mortgage contract (and realtor contract, title contract, disclosure, inspection, survey) looks like a splayed open V8. I'm pretty sure it's overly complicated on purpose, because this forces the consumer to rely on the people who are taking his or her money to make sure that they are getting the best deal.

Even after doing weeks of research on the Internet I was still pretty confused about the whole thing. Much of it made sense, the technical parts of it, but what really boggled me was "am I really getting the best deal?". There's no site that lets you put in your FICO scores and spits out the interest rate you should be getting (and if they do, it's probably from a lender site with those bait-and-switch teaser rates). It's all clouded in mystery.

Needless to say we purchased the house with a loan we liked and a payment we could afford, a small down payment, and within our spending limit. Where's our realtor again? Right, he set up the title company for us (and I'm sure enjoyed a nice kickback from that). He also sat there when we signed all the paperwork. We left and never heard from him again. He made a few thousand for maybe a dozen hours of work. Not bad.

What I questioned was why I was paying this guy for? He talked to the seller realtor, got all the contracts together but...couldn't I have easily done that myself? I searched for the house, found the house, dealt with the inspections and found a lender. I felt like a family in a silly feud with one person in the middle passing conversation to another - to whom they are not speaking but can hear them loud and clear.

With all the hub-bub over mortgages and, possibly, an initiative to simplify the process, are realtors going to become unnecessary? Or will they be luxuries for those unwilling to do the work themselves? I can easily see doing all the work without much extra effort. One would think that some crafty entrepreneur would come up with a way to search for and buy a house - right down to finding a lender, title company, and contacting the seller - without anyone in the middle. It would be nice not to pay 6% of your selling price for people to pass along the conversation.

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