CHAPTER 1
Lead Generation
So, Mr. Buyer, you want to buy a house? You get on-line, cruisethough any number of websites, all of which provide you with enoughof a teaser to compel you to give up some personal information. Thatinformation generally has to do with the following: Name, phone,email address, current "pre-qualification", time frame, size and priceof different homes that you might be interested in and the area. Guesswhat happens next: You become a "lead".
Lead generation is (or should be) the largest investment of anyreal estate brokerage. It is prudent; however uncommon, for suchbrokerages to actually do the homework and determine what thereturn on investment (ROI) will be prior to making that investmentin lead generation. Because this homework isn't normally done, thefollowing generally takes place: The only qualifying factors that canpossibly serve as qualifying metrics are the factors that those "leads"personally input when filling out their initial registration information.As you can probably see, there is an inherent skew if these metrics areused as part of a marketing presentation to you the seller.
The ability to qualify, and eventually close, that lead on somethingthat they are ready, willing and able to purchase becomes entirelydependent on only a few factors; one being, that lead's own tenacity topurchase something despite the best efforts of an inexperienced agentwith their own agenda. Another factor being the fact that some buyeragent still has to pair the listing with a qualified buyer.
Tell me if you have ever heard this: "Did you know that in someStates it takes roughly 1500 hours of pre-license education to becomea hair dresser, also in some states, it takes less than 200 hours ofpre-license education to become a licensed real estate agent?" Whocares, right? The reason I bring this up is not infer that I may or maynot be a smarter, more qualified real estate agent than someone else.
The reason I bring it up is to bring light to the current realitywithin the real estate system. Co-existing brokerages within acommon market depend on cooperating with one another in orderto get anything done. That means that any listing can be sold by anycooperating brokerage, regardless of who the listing agency happens tobe. From that perspective, doesn't it seem alarming to entrust 7.5% toan agency that will actively depend on its direct (and equally as inept)competition to sell your home? Scary.
Obviously, you can see where I am going with this. When youconsider the "time versus return" ratio involved in each side of thetransaction, it becomes very clear that there is a lot of money to bemade by listing your home. Conversely, and using the same ratio, theanguish and effort associated with qualifying a lead and getting themall the way to a closing doesn't seem to make much sense for a brokerto focus many resources. But, that's what "buyer specialists" are for.These are real estate agents who legally, have to work under a broker(as do all agents).
This is important, because they are just sales people ... and theywork for the brokerage ... just like any other situation. They do pay toplay, so to speak, and this is how.
Brokers compensate their agents, in this case, the "buyer specialist".Selling-side and listing-side brokers are both compensated by the selleras defined by the terms negotiated within the listing agreement. Thebuyer agent's compensation is generally based upon their performancewithin the brokerage and paid from some sort of a split agreementstemming from the buyer side compensation of the accepted offer.That "buyer side compensation" comes from a home seller's originallisting agreement that was discussed above.
A common example might be a "55% split". What that means isthat if a home sells for $200,000, and the seller agreed to compensatingthe selling broker 3%, then, the lowly real estate agent—who gotsomeone under contract and all the way to closing (a 40 day process)
is compensated an amount equal to $200,000 × .03 × .55 equalingroughly $3300 less any other in-house dues or admin/marketing fees.The remainder of the buyer side 3% compensation goes to the brokerof the buyer agent. The broker easily justifies that compensation splitunder the premise of lead generation and support staff expense.
If that brokerage were also the listing agency, then there would bethe selling side (listing) commission earned as well. I routinely see 7%total; so in this example, that 3% would be split between the agent andtheir broker, and the remaining 4% would go directly to the brokerage(Unless, of course the listing was the agent's own personal listing ...which happens at times).
Generally speaking, individual agents shy away from thecomplexities of listing. They are simply frightened by the detailsassociated with abstract work, repairs, etc. But once they do figure itout ... The act of listing is either embraced or completely avoided.
There are also lots of other lines of income that are tacked on in theform of "Document Prep" or "Transaction Fees", all used to increasethe margin.... and interestingly, most if not all of these are legallypassed along to the seller's side of the HUD-1 settlement statementas some form of negotiated for buyer closing cost. It is a wonderfulmisconception in that we generally associate a buyer to be the onewho is spending the money. As you can see, it is the seller who is doingthe spending; the buyer is only taking out a loan and providing thebrokerage a conduit to expense the seller.
CHAPTER 2
Buyer Agent Compensation and Motivation
I have found out that I am very effective on the phone, but deadlyface-to-face. It isn't about ripping out client's eyeballs or tearing outthroats ... It is about rapport and relationship building, trust building,sounding brilliant and being very excited and sincere as quickly as thiscan all be established ... and then helping that client to see that youare the best at what you do and that you are passionate about helpingthem to reach their goals. This is not a home buying or selling idea. Itis about getting them to their ideal situation. This is "sales 101".
When shopping for a good buyer's agent, you may or may notencounter such a polished presentation. But, if you do, give themthe opportunity to get through it. Just make sure that your agent isextremely knowledgeable about the systematic process and timelinesinvolved. The perspective buyer's agent that you are interviewing willnot like it when you make them clearly articulate this process to youand in a way that you understand. It doesn't matter though; they mustdemonstrate a solid understanding of these principles prior to doingyou doing anything. I will go into that entire process as well as give youa few examples of some of my more effective closes.
Be sure that you understand that your agent's motivation hasnothing to do with you. That isn't a bad thing at all because they arein business to make money as efficiently as possible. Their time is asvaluable as yours, so use the agent's focus as a qualifying metric in yoursearch for the right agent for you.
The agent is qualifying you as well. This is why you will almostalways be asked, "Are you pre-qualified?" (This refers to beingprequalified for a loan). This is their juvenile way qualifying a buyerand determining who is ready, willing and able. Don't be offended; youas the buyer have a large piece in this process. Do it before you evenconsider talking to an agent or a seller. You are getting ready to makeone of the largest transactions in your life, so you should probably talkto a qualified, licensed mortgage lender in order to determine exactlywhat and how you can buy. I will go into the treatment of mortgagelenders in a moment, but first, let's continue to delve into a buyer'sagent mindset.
Effective agents shouldn't default to a larger pricedtransaction ... only the number of transactions in their pipeline, solet's look at that difference in real terms. What is the difference betweena $200,000 sale and a $220,000 sale for an average buyer's agent? Youwill understand why I am defining this for you in a moment, but fornow, bear with me.
A well-compensated (non-broker) buyer's agent will makeapproximately 1.7% of the gross sales price. That means that for $200kthey will make $3400. For a $220k sale, they will make $3740, or a$340 difference. That means that they should have the same care andapproach to the $75k deal as they do the $400k deal. The process isidentical. If the agent is any good at all, they will have their systems inplace and make the process feel as smooth as silk, regardless of the sizeof the transaction. Your expectations will have been managed and therewill be no surprises; and not a lot of dialogues, outside of a possibletwice-weekly check-in "hug" call.
Back to the example, it is quite normal to have a $20k swing inprice during the negotiations of a transaction. This is important toconsider in that the seller is almost always focused on price, while thebuyer is focused on cost.
I want you to consider that based on these numbers, your buyeragent's advice for making a good offer has an effective compensationmargin for them of $340. This equates to a night at the bar withseveral friends; which when balanced against the anxiety you willbear throughout the negotiation phase, isn't much. In those terms,their advice is really not worth much. Another consideration is that adifference of $20,000 in price when financed over 30 years at a fixedrate of 3.5% costs roughly $89 per month.
Is $89 per month worth $20k to you? It is to the seller, so youcould just give it to them ... and then ask for everything else, they willgive it to you, do you know why? They have likely been told that theseconcessions have already been accounted for in the worse case scenariolisting presentation they likely received.
OK, so if you offered $200k (instead of $220k) and are asking for$13.2k in concessions, the seller will see this and likely counter backwith what they need to make it work. Again, you must consider theFACT that the seller has very likely rolled all of your closing costs toinclude a home warranty, a high repair cap, etc., which will equal asmuch as 6% gross sales price, or $13,200 ... as well as any negativeequity they may have. So, help "get them out of jail". If your buyer'sagent fails to articulate this 5th grade math to you, run away.
Had that seller not been managed to expect this request at theoutset, this may be too painful of a request to float by way of an offer.However, they won't be opposed to the idea of getting what they need tomake it all "just work", which will hopefully prompt them to composea seller's counter to the buyer's offer. Just remember, that's a good thingbecause 1: now you are having a conversation and 2: you already knowwhat their counter will say before you have seen it. You will very likelyget everything you asked for, and you will be paying (financing) a fewthousand dollars less than what you would have in the first place.
What I am trying to articulate to you is that you can do this yourselfif you choose to. If you do use an agent, make sure they completelyunderstand these concepts. Further, the seller is only thinking abouttheir net earnings. So if this makes sense to you, read on for someterms and concepts that you will need to be able to articulate whenapproaching a seller on your own; again, if you so choose to use abuyer's agent.
Remember, it isn't you the buyer, who is footing the buyer agent'scost ... it is the seller. In this regard, it is actually better to use a buyer'sagent that has a clue. Use them up; they will be happy that someone istalking to them. Leverage their professional insecurity to your benefit,so long as they can demonstrate these principles prior to you starting.
CHAPTER 3
A Thought on Lenders(for Buyers)
Conventional banks are funny places. You stick in your moneyand it essentially becomes an idea. You are putting an organization incharge of managing your money, so why wouldn't they charge you forthe facilitation of your assets.
If you want to open a checking account, you go to a bank whosemain activity centers on the maintenance (and consequent multi-levelbilling) of those funds. Why then would you go to a bank (conventionallender), whose main focus is the consistent, gradual, persistent andpredatory bilking of your checking and savings accounts when tryingto find someone that can help you with mortgage lending?
All financial institutions have investors. Those investors haveminimum requirements that must be met in order for a transaction'srisk to be authorized. The management of that risk is commonlyreferred to as "overlays". If you have a lender that if primarily focusedon mortgage lending, then their overlays will be much more timelyand flexible in terms of dealing with your specific need and situation;or better, your priorities.
Those priorities (of yours) often entail not paying for closing,which the lender can sometimes mitigate with lender credit. Otherpriorities have to do with the amount of down payment that may beneeded in the event a government-backed loan is used. Yet anotherconsideration is the management of mortgage insurance.
Bottom line, conventional banks will generally treat your homepurchase as if you are purchasing a used car. Also, in those conventionalbanking situations, those "loan officers" are not individually licensed.The bank holds the license and the "loan officers" all work under thatbank's umbrella. There is an obvious disconnect between the loan officer(in that situation) and their access to the investor or their underwriters.
Wouldn't you rather deal with a lender that deals specifically withthe type of transaction that you are trying to figure out? Wouldn't yourather deal with a licensed mortgage lender? Wouldn't you rather dealwith a person that has exponentially more transactions and experienceunder their belt?
A lot of agents have non-official relationships with differentmortgage lenders. If you ask any agent for a recommendation on whomto use as a mortgage lender, they will most definitely give you 1 or 2options. They will give you these recommendations based on comfortlevel of reporting, getting information, simple things like the lenderpicking up their phone and being upfront with the situation, etc.
The industry is based on relationships and experience. A goodlender/agent team is incredibly valuable and this will cause yourtransaction to look and feel insanely simple and without drama. Atthe end of the day, the lender that you use is your choice. You canshop around, but do so before you get into the offer/negotiation phase.
I sometimes make a recommendation for a specific lender based onthe buyer's priorities and personality type. For example, if the buyer isconcerned about the expense associated with closing costs, I will try tofind a lender that has a lender credit program.
I know what price point the buyer is looking at, so I just ask theprospective lender how much lender credit they could come up withif pushed. Then, I do a worst case scenario "net-sheet" for the buyerfor that price point identifying highest case values for home-ownersinsurance and taxes (pre-paid buyer expenses) and figure out whatthe worst case scenario closing costs will be. After that, I subtract thatlender credit amount offered from that lender from the "worse case"number I came up with.
When the buyer finds something to make an offer on, update thenumbers and then offer the seller an offer with seller conceding a lowerbuyer closing cost value then they expected to concede. I am essentiallyleveraging the lender's "lender credit" into the buyer's offer.
Sometimes, I upset the lenders I work with because I will initiallysend the buyer to a bank and then tell them to, "Ask the lender for afee sheet". (The biggest reason that I do this is because it isn't reallythat ethical to steer a perspective client to a single lender). Then, whenthey go to my preferred lender, they simply need to state: "Here yougo, beat this", which almost always happens. That newly discoveredsavings is generally realized in up front overhead costs like transactionfees, origination fees, etc.; but not interest rates, those are based onyour credit history.
Prior to submitting an offer, the buyer will need to obtain aConditional Loan Approval from a valid lending institution. It isduring the qualification phase that the lender will assist the buyerin determining the maximum buyer's purchasing power. It is not aguarantee that a loan will be given; however, it does check your creditworthiness and known history. The Buyer or Seller should not confusethis with a Final Loan Commitment that is not obtained until prior toclosing to ensure all of the Buyer's financials are considered.
