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Jeffrey A. Hill, Real Estate BrokerEvery time I speak with a seller or buyer, the following explanations prove fruitful:
By Jeffrey A. Hill, Real Estate Broker
Every agent is an independent contractor - No matter which company they work for, each agent is an independent contractor, and is self employed.

A seller may think they are hiring a company when they list a property with an agent who works for a franchise type of company. The Company is not going to do a thing for the client, only the agent will complete or not complete any activities associated with marketing a property. Use of a franchised name implies a company is there to represent you, and in fact, it is not. 

Brokerage fees are customarily paid for by a seller. Buyers never pay brokerage fees, or do they? If a seller has no sale, are there any brokerage fees due to be paid? Buyers always pay brokerage fees, indirectly, in the form of a higher sales price. Although the fees do come directly from the seller’s side of a transaction, without a buyer there are no fees due. A buyer is the only one who ever pays the brokerage fees involved, indirectly in the form of a higher sales price.

Discount brokerage firms or FSBO. (For Sale by Owner)

A FSBO wants to “save” the brokerage fees. Who is saving them? Not the buyer if they pay the same price as a listing across the street that is listed by an agent. If a buyer wants to buy, are they going to look at other properties, or just one FSBO? An educated buyer will look at all available properties, including any FSBO’s or discount brokerage firms listings, and will make a decision based on the available properties, and what has sold within the last 3-6 months. 99% of all sales of homes are completed with the involvement of financing. A financing contingency is subject to an appraisal. The appraiser is limited to CLOSED sales that have occurred within the last 3-6 months. An appraiser will use a minimum of 3 similar properties within a one mile radius, make adjustments up or down for condition, location, square footage and any other amenity a comparable property features verses the subject property. To a degree, a seller is always limited to the last closed sales, with minor increases for market conditions (supply & demand). Example, if 3 exact model matches all sold for $500,000.00 within the last 3 months, with only slight variations, all with agents involved, the property in question (exact model) would be appraised at $500,000.00 If a FSBO wants $500,000.00 for their property, the chances are very high you can find a BETTER VALUE in a property that is listed with an agent down the street or within the same neighborhood! The FSBO’s property is worth $500,000.00 MINUS brokerage fees. If the FSBO agrees to sell to a buyer for $470,000.00, then the BUYER saves the brokerage fees. 

If a seller fails to provide the required documentation to a buyer, and closes the transaction, the buyer may sue the seller in court. It is possible the seller could be liable for up to the sales price, and the buyer can possibly get a judgment against the seller for failing to disclose, or many other reasons. The court may require the seller to refund the buyer their money, and possibly impose punitive damages against the seller. Is it worth it? A question only you can determine!

Discount brokerage firms are like FSBO’s. 

The way a buyer looks at the sale would be the same way a buyer looks at a FSBO. For a seller who considers a so called discount brokerage firm, that seller is getting just that, a discount agent. If an agent has initially agreed to work for less then the customary fees that other agents usually work for, HOW can a seller expect that agent to be skilled in negotiating the highest price for that seller? If the agent has began the transaction by first negotiating their own fees, you (buyer or seller) would have unrealistic expectations to think an agent who works for less, (less then is customary in the industry) and get the same results as an agent who refuses to begin the negotiating in a transaction with his or her fees. Common sense should tell you this. The agent will not have the ability to negotiate the highest price for the seller and a seller should not expect that from a discount agent or that seller or buyer has unrealistic expectations, just like a FSBO. 

A buyer will make offers based on the fees that are being ‘saved’, and effectively no savings will occur.

Brokerage fees are not fixed by law, and will never be fixed. Although a usual and customary fee is charged for each side of a transaction. An agent who represents a seller is referred to as a listing agent. An agent who represents a buyer is referred to as a selling agent. In theory, the listing agent is attempting to obtain the highest price for the seller, and is first and foremost obligated to the seller to obtain this goal. The selling agent is obligated to the buyer to obtain the lowest price for the buyer. An obvious conflict of interest exist in theory, although it is legal for a buyer to be represented by the listing agent, the conflict of interest is apparent to most buyers. Every seller has their own personal situation and circumstances. For a buyer to get a “good deal” on a property, all the buyer needs is to have a very motivated seller! A discount brokerage firm will provide just that, a discount in service and ability, not the sales price, and not a motivated seller! 

The value of an agent is in their ability to negotiate.
The value of an agent is in their ability to negotiate.

I say this twice because it is the ONLY value of an agent.
With the invention of the internet, anyone can pull up a list. 
A taxicab service can drive you around. 

The only value of a Real Estate Agent is in their ability to negotiate the highest price for a seller, or the lowest price for a buyer. 

How do I find a good agent?

Referral from a friend or relative! A good agent is usually very busy. 
I personally work mostly by referral. I have been successful for a great deal of sellers AND buyers, and have a constant, steady stream of referrals from hundreds of satisfied clients. This is one sure way to tell the agent has refined skills in negotiating and communicating. The length of time agent is licensed is no indication of their ability. A good agent should be able to produce several, if not a hundred satisfied customers. I personally can produce hundreds!

Most agents think only of how much is in the sale for them!
If you have looked for an agent at all, the chances are very high you have met one or more. When an agent has only their pay check in mind, it does cloud their ability to do the best job for a client (buyer, seller OR borrower)

Statistically over 80% of agents that obtain a Real Estate license are in the business for 2 years or less.

Statistically about 94% of agents make very little or no income from the real estate industry.

There are agents who have been BROKERS for over 20 years and still make very little, and continue to provide a disservice to the general public. I believe it is because they first think of themselves and not the client.

The very first and most important issue at hand is the client’s needs. If an agent thinks of what the client needs 1st, that agent will get paid as a by-product of servicing the client. This is a well known fact in the Real Estate industry, as well as many other industries.

Some things to remember: 
You get what you pay for, sometimes less.
You can lead a horse to water, you cannot make them drink. (Unrealistic expectations)

The saying in the industry is, “Lenders lie like rugs! All the time!"
Why did lenders get that reputation? From lying all the time!
It is a deserved reputation, and you may have an experience yourself.

Here are some lies in advertising for you to call the lender:

  • No Cost, No Fees! 
  • No Points, No Closing cost, only $99.00 flat fee!
  • You want a $200,000.00 loan; you’ll get a $200,000.00 no extra cost!
  • A $200,000.00 loan or a $600,000.00 loan, you get the same rate!
  • Good credit, bad credit, no credit, no problem.
  • Good credit or bad credit, you’ll get the same low rate!
  • Why should we charge you points or fees, were making enough over the life of the loan!
  • We’ll come out and mow your lawn and wash your windows!

How can a lender advertise such blatant non-truths?

The exact wording was structured to miss-lead the client to call the number advertised.

Each individual borrower’s circumstance and qualifying abilities are different.

If a borrower has a perfect credit history, is anyone going to provide a loan at the same rate as a borrower with poor credit?

Common sense should answer those questions for you.

W.C. Fields said it best; “There’s a sucker born every minute” 

With the rate children have been born since he made that statement, it’s safe to say every 30 seconds or less!

Here is how the Mortgage industry works:

It is now like a giant machine, producing billions of dollars for borrowers and lenders alike.

A borrower walks into a retail branch of their local bank. That borrower is promised a loan amount, interest rate at a specific cost or no cost. (Retail rate)

The same borrower applies with me as a mortgage broker or company. I submit the borrower to the EXACT SAME BANK. The bank will extend a WHOLESALE RATE to me as a broker, on the average 2% of the loan amount in the form of a rebate. The exact same loan is obtained from the exact same lender for the exact same price, only I earned 2% of the loan amount. To save the borrower money, I can give a refund to the borrower, and the borrower ends up with a loan BELOW retail cost! This is the only way a borrower can get a loan below retail rates.

The difference between wholesale and retail is usually 2% of the loan amount!

Most times, the lender or bank will say to the borrower that they do not fit the loan program that was originally offered, and they have another one that the borrower will qualify for. If a bank tells you the programs they have for you are unavailable, and they want to get financing from another source, the bank then acts in the role of a broker. 

A broker can search thousands of sources, including all the major lending institutions, and provide a borrower with more options then a single institution. The reputation I mentioned above was earned! The mortgage broker will want to charge origination fees, plus get a rebate, administration fees, processing fees, and any other fees they can get away with. If a mortgage broker can make 4% to 5% they are happy! They do not care to provide a client with the lowest rate at the lowest cost. Most Americans call this capitalism. If you go to your job, and the employer pays you double your paycheck for the same job, would you complain? What if your employer told you that they found someone that would work for 25% less then they are paying you? That you had a choice to accept less or they would hire the other employee? Would you accept less for the same job? This is exactly what happens every day across America in the Mortgage industry.

There are thousands of different loan programs available depending on your (the borrower) qualifying ability. All 3 of the major credit repositories have web sites that explain the “prime” borrower referenced in so many advertisements.

The “Prime” Borrower.

The “prime” borrower will qualify by getting a loan for a home with a 20% down payment. This is so the borrower has enough of an investment at risk, in the event of a default of payments to the lender; the lender can foreclose on the borrower and liquidate the property without a financial loss to the lending institution. The “prime” borrower will have ‘AAA’ credit rating, owner occupy the subject property, and have a maximum loan amount below conforming loan limits. Conforming loan limits as of December 2004 were $359,650.00. This limit changes as the inflation increases within the United States. In 1989 the conforming loan limit was $203,150.00

Above this limit, the loan becomes what is known as a jumbo loan. Today (June 2005) the jumbo loan limit goes up to $750,000.00 in California, (some lenders will only go to $650,000.00) and over that amount, the loan is called a Super Jumbo Loan.

The higher the loan amount, the higher the interest rate.

The lower the credit score, the greater the risk for the lender, the higher the rate they will charge.

There are loans now available for a borrower to purchase up to $1.5 million purchase price or refinance with ZERO down payment. (100% of the value of the property)

The “prime” borrower will have the ability to document their income for the last two years, (tax returns) and have a DTI (debt to income) of 32% of the borrower’s NET income. To determine your DTI first average your monthly NET (after income tax) income. Then multiply that average monthly NET by 32% or 0.32. From that number, subtract any current debt obligations (monthly payments for a car, credit cards, or any other monthly debt you make payments on that has a 10 month or longer time to pay off) and the amount of monthly income is equal to the amount of monthly payment you can make for the TOTAL cost of a property in question. Total monthly payment includes Principle, interest, taxes (real property tax), insurance, association dues (if applicable) mello roos and any other cost associated with the specific property you are interested in. That is the “PRIME” borrower. 32% of your NET income minus current debt obligation equals total PITIA & MR. PLUS maximum loan to value (LTV) of 80%, owner occupied with a maximum loan amount within conforming loan limits.

In Southern California you would need to make a million dollars a year to buy a condo in some areas.

This is where the “sub-prime” market takes place.

All that term means is any borrower that is NOT a “prime” borrower as described above.

In the sub-prime market, the lenders set their own qualifying criteria. Many lenders will allow a low score of 580 and still provide 100% financing up to $750,000.00 purchase price! (June 2005)

A sub-prime lender may not require proof of income; this loan product is called stated income. Not available for W-2 employees.

A sub-prime lender will allow DTI ratios of up to 54.49% of GROSS income, verses NET income.

As usual, the higher the risk, the higher the interest rate.

Still attainable, 100% purchase up to $1.5 million purchase price, stated income!

Seems unbelievable, although it is true!

Loan programs fluctuate, and interest rates change.

Typically a lender or lending institution will borrow money from the federal government at what is known as the “PRIME” rate. The lender will add a margin, usually 2.5% to 5% or more, (depending on the borrowers qualifying ability) and then lend the money to a borrower. There will also be charges called points. Points refer to a percentage of the loan amount. 1 point of 1.5 million is $15,000.00 The difference between wholesale rates and retail rates is approximately 2 points. $30,000.00 for a $1.5 million loan. Now that is a nice paycheck. Even with a paycheck like that, the brokers that only broker loans in the industry, will want 3 or 4 points! The broker that charges that amount will say, “If the borrower thinks they are getting a good deal, then it is a good deal”. Personally I think there is a point the charges become excessive, the client would have been charged less if they have come to me or my company!

If a borrower walks into there local bank depository, the bank will also borrow money from the federal government, add their margin, and loan it to borrowers. Banks are also allowed to loan up to 94% of every dollar that is deposited into accounts with that bank. If a borrower has a checking account with an average balance of $2,000.00 every month, that bank has loaned $1,880.00 of the depositors $2,000.00 at a rate equal or greater then the “prime” borrower will pay. How much interest did you collect on this deposit? Chances are you received less then ½ of 1%. 

That is another way a bank or lending institution makes a profit.

Profits are a good thing! If no profits are made, that business will no longer exist. Unconscionable profits from fraud or deceit are usury or criminal. 

Your deposits into a bank are insured up to $100,000.00 per account? If you read the actual insurance, it is our tax paying dollars that insure only principle deposits. If a bank fails, like Lincoln Savings & Loan in 1989 (and all other S&L’s at that time), your deposit (principle only) into an account will be paid back to you in monthly installments, WITHOUT interest! So much for the insured accounts, accounts insured by F.D.I.C. only now, no more F.S.L.I.C.

This description is only the very minimal understanding a buyer, seller or borrower should have. 

It is only the ‘tip of the iceberg’ of what is available to know in this industry.

There are investment properties, residential, commercial, industrial and raw land.

There are development opportunities, income opportunities and much more!

There is a secondary market where most of the loans are bought and sold. There are servicing contractors, mortgage insurance companies, and government insured loans. There are private money loans available; including what is called “Hard Money”. Each state has its own rules on lending, and how money is secured by real estate. 

The hopes of the author of this writing are to increase the understanding of the reader to the real estate industry and the lending industry associated with real estate. The author is a licensed California Real Estate Broker and practices real estate sales, listings and arranges financing in the Southern California area. 

For an interview with a professional, time permitting please call 949-488-7653.

Jeff Hill


[Logo: Fair Housing and Equal Opportunity] 1976 S. La Cienega Blvd. Suite 420, Los Angeles, CA 90034 Ph: (949) 488-SOLD (7653) Fax: (949) 443-0343

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