What every homeowner should know before selling their home!
By: Herbie Morewitz of Morewitz Realty Inc.
THE 6% REALTY COMMISSION AND THE DIRTY LITTLE SECRET - Almost 90% of all homes listed for sale by area realty companies are sold through Multiple Listing Service (MLS) by another firm. In other words, you hire Realty Company A to sell your home, which they input into the MLS database so that another company can sell it. An agent with Realty Company B brings the buyer, writes the offer and after some negotiating, the transaction goes to settlement, with the two realty companies splitting the commission. So, why should a homeowner agree to pay 6% to a realty company to list and sell a home? In short, the answer is you shouldn't. But beware of the 6% company's sales pitch. They will throw everything at you but the proverbial kitchen sink, but the line used most of all is when the agent tells the homeowner, with a straight face mind you, that they have to charge 6% and offer the selling agent their 3% split or else other agents won't show the property. This is a patently false statement. In the Hampton Roads real estate market, agents rarely walk away from their fiduciary obligation to their buyer over a quarter percent. Note to sellers: If there is an issue with the buyer agent's commission split, guess what, that's an issue between the buyer agent and his client and should not concern the seller, and a skilled seller agent will see to this. Also, some companies have begun to charge sellers transaction fees in the $300-$500 range. This is on top of their commission and is unconscionable. Sellers should just say NO to transaction fees.
THE PRE-LISTING APPRAISAL. Some realty companies won't list a home until it has been appraised by a licensed real estate appraiser. Some even squawk that they have reinvented real estate by requiring an appraisal before they will bring a home to market. To these realty companies I ask, what do you think your real estate license is for anyway? There are many reasons a seller should avoid a pre-listing appraisal. The primary reason is that, by rule, appraisers must look at past closed data to determine your home's value and in some cases this data is 6-12 months old. In a market where property values are fluctuating on a monthly basis, do you really want your home's value based on what someone else sold their home for 9 months ago? Furthermore, the appraisal is only good for the day it's issued, so when you actually sell the home down the road, the buyer's lender is going to order their own appraisal anyway, so the pre-listing appraisal can be a waste of time and money. But beware the realty company that pushes for the pre-listing appraisal, as they will tell you, again with a straight face, that there is no cost to you for this appraisal, its part of our service
This too can be misleading if the realty company insists on charging you a 6% realty fee or better. You see, they are simply building the cost into the listing commission, its economics 101. Note to sellers: A skilled seller agent can determine your home's value without the assistance of an appraiser and can conduct a comprehensive market analysis based not just on closed data, but also on projected growth in your market area.
THE PRE-LISTING HOME INSPECTION - Same song, second verse with a twist. While having a home inspected prior to listing it for sale is something sellers have been doing for decades, there are actually some realty companies who claim to have revolutionized the real estate industry for insisting that the home be inspected before bringing it to market. The bottom line is this. There are two schools of thought at work here. One says that the seller should have the home inspected prior to offering it for sale so as to repair and/or disclose the home's defects to the buyer. The other says wait, because most buyer agents worth their salt are not going to let their buyer clients rely on an inspection report bought and paid for by the seller. They will recommend that the buyer order his own inspection, so as with the pre-listing appraisal, ordering a pre-listing home inspection can be a wasteful effort in duplicity. Note to sellers: Home inspections are notoriously subjective. You can have three different home inspectors provide three different reports on the same home. What if one indicates a defect when there is none, are you obligated to disclose the defect the buyer? The answer is probably yes. Don't risk it, play it cool and let the buyer conduct his inspection and then respond accordingly.
AFFILIATED RELATIONSHIPS - There is a peculiar phenomenon taking place in the real estate industry and it involves realty companies, attorney's, lender's, title companies, appraisers and inspectors basically teaming up to separate you from your money, but don't worry, it's all perfectly legal as long as your agent discloses the relationships. It works something like this. You decide to hire a realty company to list and sell your home. At some point during the process the realty agent recommends that you use the services of a certain attorney to handle the closing and because the agent has such a great working relationship with this attorney, the costs will be very reasonable, better than you could possibly negotiate on your own. Sounds almost too good to be true doesn't it? Well, always remember what mother told you and remember this, when push comes to shove, where do you think this attorney's loyalty will lie, with you and your one transaction or with the realty company that delivers 250 closings a year to this attorney? Note to sellers: Selling your home is one of the most significant financial transactions you will ever be involved in, shop around for a real estate attorney or title company that will work for you and you alone. Be especially wary of attorney's or title companies who have offices under the same roof as the realty company, as this may indicate an unhealthy dependency on one another.
REFINANCING - Congratulations, you just shaved $150 or so off of your monthly mortgage payment by refinancing your home loan. Break open the bubbly because the good news is that you did indeed just reduce your monthly payment. The bad news, however, is that you just created a brand new loan, which leads to the ugly fact that you just significantly increased the amount of interest you will pay over the life of your loan. The best way to explain this is by way of illustration. Let's say you have a $100,000 mortgage that was originally a 30 year loan when you took it out 10 years ago, which leaves 20 years remaining to payoff the loan in full. The first thing to understand about refinancing is that when you refinance, you create a brand new loan and start the mortgage clock all over again, so if you refinance every 5-10 years, you will never pay off your loan, not ever.
The next issue that requires your attention is a bit more complicated and involves the makeup of your monthly mortgage payment, which consists of four parts, Principal, Interest, Taxes and Insurance (PITI). Let's strip away the Taxes and Insurance, as these are out of your control and will usually increase every year or two as your home's value increases. What you can control are the Principal and Interest components of your mortgage. When Banks and Mortgage companies lend you money, they always frontload the interest. In other words, your monthly payment in the early years is almost all interest. Let's say you borrow $100,000 on your home and your monthly payment is $750 (PITI), take away $150 for taxes and insurance and you are left with $600 per month to apply towards Principal and Interest. Of this $600, only about $50 applies to principal, which goes to pay down your debt. The other $550 is Interest, which represents cold hard profit to your lender each and every month.
Over time, however, things change in your favor if you leave your mortgage alone, as your monthly principal component goes up and your interest component goes down, so after 10 years or so of making monthly payments, about $250 applies to principal and about $350 to Interest. So now here you are, 10 years into your mortgage, with your money working for you to the tune of $250 each and every month in principal pay down. If you refinance this loan now, while you can surely reduce your overall monthly payment, you start the interest clock all over again and you are back to square one, with only about $50 a month going towards principal pay down. You just went from paying down your debt by $250 a month to $50 a month. Always remember what mother told you about things that appear too good to be true and pass the bubbly, as all this typing has made me thirsty. Note to homeowners: If you are considering refinancing in order to draw cash out of your home, consider leaving your first mortgage intact and simply borrow what you need through a home equity or second loan.
Herbie Morewitz is one of the area's preeminent real estate brokers and speculators
Morewitz Realty specializes in seller representation and lists and sells homes for 5 1/2%, total realty fee and full MLS.To find out what your home is worth call Morewitz Realty at 873-0841 or visit us online at MorewitzRealty.com for a free, no obligation home market analysis and discover the difference between "for sale" and SOLD!