Thursday, September 22, 2011

Conflicts of Interest

There are a few inherent conflicts of interest that you will likely run into during your home buying process.  I think it is useful for you to be aware, although hopefully you won't run into any bad situations.  You should interview as many real estate professionals as possible and rely on the advice of your friends to find someone who is trustworthy.

Your Realtor (Buyer's Agent)
The Realtor only gets paid a commission if you purchase a house.  So, like any other salesperson, you should have some skepticism if you aren't finding anything you like, but the Realtor is pushing you to reconsider.  A good Realtor will help you to understand if your expectations aren't realistic.  A bad Realtor will pressure you to move forward on a house that you are only luke-warm about.

This conflict can also come up after you've had your offer accepted - perhaps you discover something during the inspection that makes you consider walking away.  If you walk away from the deal, the Realtor's time to that point could be considered "wasted".  A good Realtor, of course, will be happy to help you look for a new house.

The buyer's agent also gets paid a percentage of the sale price.  It is in your best interest to pay the lowest price possible, but this does not help your Realtor.  Consider this when you are placing an offer on a house.  If you are a first time home buyer like I am, you'll probably rely heavily on your Realtor's advice.  If you feel strongly about what you want to bid, but your Realtor thinks you should go higher, take this advice with a grain of salt.  Consider the extensive budgeting and spreadsheet work you have done and don't let anyone push you into a house you cannot afford.

Your Banker / Mortgage Broker
Your banker / mortgage broker's job (I'll just refer to this person as a broker) is to generate business for his/her firm.  He is trying to make the most profit off of you as possible, without scaring you away.  Your best defense here is to shop around.  You can speak to multiple brokers and you can compare what they are offering on

Now, just because Bankrate says you should get a 5.00% mortgage but your broker is offering 5.15% doesn't mean he is trying to take advantage of you.  Rates on Bankrate are quoted using the most basic parameters (zip code, purchase price, % down, range of credit score).  Some lenders on the site will also show a rate such as 5%, but they will charge substantial fees.

Brokers earn money in two ways - fees and selling your loan.  Fees are pretty straight-forward - they'll charge you an application fees, processing fees, bank appraisal fees, etc.  If your broker doesn't work for a major bank, there is a good chance that they will not hold your loan.  In this situation, their goal is to charge you as high of an interest rate as possible (without you going elsewhere).  They are then able to sell that loan to a major bank which, for example, is happy to buy a 5.15% 30 year loan if you have a 800 credit score, when they know that would usually be priced at 4.75%.

It might not be a "conflict" but I think it is also important to make clear that once you've started down a process with a broker, it is difficult to change.  Over the past few years, new legislation has been introduced that requires brokers to provide a "Good Faith Estimate" or GFE which should detail all the costs of your mortgage.  Pay close attention to this, ask lots of questions about what each item means, and ask what numbers could change.  As you get closer or reach closing, make sure these numbers don't change.

Your Lawyer
You should actually feel pretty safe here.  Your lawyer gets paid whether you complete a deal or not.  The only conflict that could arise might be if your lawyer and your Realtor or broker have a close relationship.  If you are being charged hourly, of course they have incentive to bill you for more hours.

Your Inspector
Again, not much to worry about here.  He/she gets paid either way.

The good news is that Realtors, brokers, lawyers, and inspectors find a lot of business through referrals so it is most definitely not in their interest to treat you unfairly.  They also could face serious consequences for treating you unfairly.  It is up to you though to seek out real estate professionals you can trust.

Bad Home Buyers and the Real Estate Professionals Who Hate Them
From their point of view, there are a few bad behaviors that will leave them frustrated and less willing to help you:
  • Home buyers who are unwilling to sign paperwork saying they are represented by a specific Realtor
  • Home buyers who think house hunting is a fun way to spend their weekends but have no real intention of buying (and don't say so)
  • Home buyers who get too excited, make offers, but then realize they can't afford the house
  • Home buyers who get cold feet and try to create ways to get out of a deal
  • Home buyers who try to negotiate with a seller on the side to reduce the purchase price on paper - this can lower the loan amount you need or could allow you to pay with income you haven't declared, but a lower purchase price means less commission for the Realtor and can raise red flags with your broker and lawyer
  • Home buyers who drag their feet in getting paperwork to their broker, but then dump a pile of documents on them and get frustrated at the turnaround time

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