The One Stop Shop… not a cost-effective way to buy anything, especially a house.
In just 6 months, we’ve seen interest rates move from record lows to highs we haven’t seen in more than a decade. Wonder how the rising interest rates will affect your dream of home ownership? No doubt, the rate hike will have a big impact on the monthly nut you’ll need. A $300,000 loan will cost you $300/month more now than it did at the end of 2021.
It’s a gut punch but not the end of the world. With mortgage rates still climbing, cutting expenses has become more important now than ever before. You can’t control the interest rates, but you can reel in your closing costs.
Over the last 20 years ALT Title has closed more than 18,000 real estate transactions throughout Pennsylvania. Needless to say, we have a lot of experience working with lenders, mortgage brokers, and real estate brokers and agents from both sides of the table. And we both prepared and reviewed a lot of settlement sheets full of closings costs. For what it’s worth, here’s our take on where those unnecessary fees are hiding and how you can easily avoid them.
One Stop Shop: The Cost of Convenience
In today’s fast-paced world, we like quick and easy. Real estate is no exception. If your real estate agent suggests that you use their one-stop-shop for all your real estate needs, stop and think. The all-under-one-roof solution sounds great in theory – less time, less effort – but a convenient solution is rarely a cost-effective way to buy anything. Ever buy a 2-liter bottle of soda at a gas station?
Extra Fees & Ancillary Services
Let’s be clear. The real estate industry is regulated by both the state and federal governments to protect consumers against financial practices that could drive up their costs. Service providers are prohibited from paying kickbacks or offering other financial incentives in order to gain more business. No quid pro quo permitted. But let us point to the legitimate ways the proverbial backscratching is done.
Unlike thirty years ago, most real estate brokers don’t make money by selling homes and earning a commission. To retain staff, brokers end up paying out the majority of the company commission to the sales associate. As a result, many brokers charge hefty administrative fees for a supplemental income stream. Or they direct you to their in-house service providers such as mortgage, title insurance and/or homeowner’s insurance. Under this business model, there simply are not enough dollars to go around to offer a great deal to the consumer. In fact, it’s just the opposite.
Many real estate brokers enter into arrangements with mortgage lenders as well as title insurance and homeowner’s insurance companies. The broker will share in the profits when they steer their clients towards their affiliates. In some cases, they offer their sales associates the opportunity to purchase shares in the affiliate companies for additional income, as well as offer them an incentive to keep the business in-house. The client is sold on the convenience of the “in house” option but one thing they’ll hardly ever hear is that the in-house service providers will save them money. It’s just not possible to offer the customer a really good deal when you rely on every dollar earned on those services to drive profits.
Consumers who shop around can save substantially on their closing costs.
And we're not the only ones who think so. Get practical advice from the Consumer Financial Protection Bureau:
Some real estate brokerages claim to take a fresh approach to an industry that runs on a model that’s more than a half-century old. Instead of working on commission, their agents are paid a salary. Some offer a modest commission credit back to the buyer but it’s the same old story. The consumer can’t catch a break because the brokers still rely on administration fees and fees from ancillary services to pad their profits.
Real Estate Commission Credits
Commission credits are fairly common in the industry and have been around for decades. But more often than not, these credits are going to another professional, not back to the consumer. Corporate relocation companies will refer business to local real estate brokers - in exchange for a fee of course - sometimes as high as 40% of their commission on the deal. Commission credits between professionals offer no benefit to the consumer, but as we’ve identified already, they may be part of the reason your being asked pay sticker price or even higher for ancillary services.
No doubt, Realtor.com and Zillow are great websites for finding your dream house and making the short list of homes you'd like to tour. However the fact is that any licensed real estate agent can show you those houses. When you click the convenient “contact a local agent” button, that website sends your request to an agent willing to pay a referral fee for the lead. Zillow will soon introduce a new program for agents paying for leads. Rather than a flat monthly fee, agents will pay Zillow a portion of their commission earned on the deal. Speculation is that the fee may be as high as 35% of the commission. We believe that you’ll get a better deal if choose your own agent and, better yet, choose one who is willing to give YOU a commission credit without tacking on more fees. These agents are out there and we work with them every day.
The consumer-friendly alternative: only hire independent companies.
If anyone has the power to disrupt the real estate industry, it’s you, the consumer. If you’re looking for a more equitable, cost-effective way to buy a home, build a team of independents. Reach out and hire your real estate professionals directly to be certain they are not paying a referral fee for your business…and burying that fee in your closing costs.
Tips for Choosing Your Providers
Don't be afraid to interview prospective providers to get a feel for how they operate.