Using Realtors to Buy: Lesson Eight

Are Realtors Really Free?

Welcome back to the Theopetra Testament. Subscribe now for educational posts bridging the gap between cryptocurrency and real estate. This post, composed by our Self-Repaying Home team, will give you a brief update on financial markets in relation to housing before diving into the eighth part of our series on purchasing a home. We will take a look at what realtors do in the buying process and whether it makes sense to use one in your home search.

Market Update:

Current Mortgage Rate: 5.89%, and that’s DOWN 13 basis points week over week (yikes).

Markets continue their rocky 2022, nursing the COVID stimulus induced hangover from the 2021 bender, with S&P500 formally entering a bear market (decline of 20%+ from the highs), housing hitting the pause button (pending sales, home tours, offers, and requests for agents all at 2 year lows; shares of house listings with price drops at 2 year highs), and a Federal Reserve determined to stamp out inflation and nowhere to be seen to provide stimulus and ease the pain for markets (in fact, the opposite: an additional 75 bp hike is now priced in for July and a total of 8 hikes priced in between now and end of February 2023).

Where does this leave markets? A global stagflation environment where economic data is slowing in the face of increasingly faster and quicker rate hikes. As measured by Citi Economic Surprise index, economic data is near/at 12 month lows, with a negative Q1 GDP print in the books and Q2 GDP now estimated to come in at literally, 0.0 (Atlanta Fed GDPNow). For those keeping score at home, this would put the US Economy literally in a textbook definition of ‘recession’ given two consecutive quarters of no/negative growth.

And this isn’t just a domestic issue; it is a global phenomenon. European PMIs are crashing, highlighting slowdown in prices and economic activity, while Chinese shut downs and COVID policing continue to wreak havoc in the global supply chain. In Japan, the Bank of Japan (BoJ) is throwing more chaos in markets by attempting to keep a lid on its borrowing rates; through yield curve control (YCC), the Japanese Central Bank is on pace to print 10 TRILLION yen (~$75 billion) this month solely to buy JGB bonds and keep yields at their respective 0.25% target.

So while others zig, and are actively raising rates to stem inflation, the Japnese are zagging, culminating in a QE program that's biggest on record and equals an entire average month’s worth of European Central Bank (ECB) stimulus in just two days.

This kind of global monetary conflict of actions is not something investors and global risk markets have had to deal with since the pre-2008 financial crisis. As such, interest rate volatility, as measured by the MOVE index (the bond market’s version of the VIX), is at 15 year highs and nearing pre-2008 crisis levels. Markets, and specifically risk, hate uncertainty – and in 2022, there is no shortage of this uncertainty.

So as interest rates rise, the Fed is attempting to engineer a ‘soft landing’. An economic slowdown that does indeed curb inflation but does so without damaging the consumer. If we check in on the consumer, the latest U Mich Consumer Confidence surveys unfortunately show a consumer that is as the zoomers would say are “down tremendous” at an all time low; confidence in the economy and spending habits are crashing to never before seen levels in the economic index, with the average consumer feeling worse now than the COVID 2020 crash, 2008 financial crisis, and even 9/11 attack.

What’s driving the blues? National gas averages at all time highs and over $5/gallon throughout the United States, for starters. At the same time, headlines have begun to hit of layoffs and hiring freezes; since the start of May, companies across all industries such as Paypal, Netflix, Coinbase, Redfin, and Wayfair have all announced significant layoffs. The consumer is tapped out, with data showing consumer credit card revolving debt surging and near all time highs while savings rates collapse. With this recipe, it’s no surprise initial jobless claims are climbing and at 6 month highs.

As we move forward in time, there are silver linings that ideally, the bottom is closer than most think. Having peaked in November 2021, the Nasdaq and tech have been in a bear market for nearly 8 months; most recent bear markets have bottomed around month 12. The market is pricing an incredible amount of hawkishness from the Fed, with the overnight Fed Funds rate priced at ~4.0% by February 2023. And over time, baseline effects of inflation should begin to decelerate (even if inflation never truly declines), as the hurdle rate for significant Year over Year inflation growth is quite high.

Yet with that said, we listen to recent Fed and market speak, it doesn’t look, ahem, ideal: “Home price growth can slow, would be welcome [...] want to cool prices” - Daly

“Fed must take steam out of inflation” - Evans
“Will be very challenging to achieve soft landing” - Powell “Stay safe, frens” - THEO team

Interesting Housing Headlines

Moody’s Analytics chief economist Mark Zandi says frothy house prices should be a drag on future home price growth. Over the coming 12 months, Zandi predicts year-over-year U.S. home price growth will plummet from the record rate of 20.6% to 0%. In significantly "overvalued" housing markets like Boise and Phoenix, Zandi forecasts a 5% to 10% home price drop.

Lumber prices hover near recent lows as new home construction sinks and mortgage rates jump to the highest since 2008.

“The prevalence of fixed rate mortgages, tight credit conditions and a relatively healthy labor market still rules out a price crash,” Capital Economics senior property economist Matthew Pointon said.

Lesson Eight: Buying a House - Are Realtors Really Free?

One common phrase you will often hear realtors say when buying a home is that “using a realtor is free”. While technically the seller does pay the realtor fees for both the selling and buying agents, there is no free lunch!

The seller cares about the total money they receive for their house after paying all fees. Therefore, a buyer with an agent asking for a 2.5% commission results in 2.5% less in the seller’s pocket. So if you don’t have a realtor your bid can be 2.5% less and appears the same to the seller! On a $500,000 house, that equates to $12,500!

Now, we aren’t simply about saving money here. Whenever considering a cost you always need to think about the potential benefits as well- ‘is the realtor worth 2.5% to me?’ is the question you need to ask yourself. It wouldn’t make very much sense to save $12,500 in fees if the realtor is providing services to you worth $25,000, innit? Let’s take a look at the benefits of either using or not using a real estate agent to purchase a home.

Realtor Benefits:

1. Finding your dream home - realtors use automated search engines with access to larger Multiple Listing Services (MLS). Your realtor can help set you up to be on high alert any time a property is set to hit the market that fits your needs. While Zillow/Redfin/etc connect to the MLS as well, they can often be outdated and not show new listings as quickly or when a property is already under contract, making the search process frustrating. This can be particularly beneficial if you are moving to an area where you aren’t very familiar with the neighborhoods, schools, etc. Realtors may also potentially have access to homes before they hit the MLS through their connections. This can be particularly helpful in a hot market.

1. Provide help in the bidding process - a realtor can provide in depth research and market analysis helping to construct a well thought out bid to win a house without overpaying. I’ve even had a realtor connect me with renovation teams at a reduced rate. Realtors have experience negotiating real estate deals which could be helpful. They can help suggest alterations to the contract such as the amount of down payment, days to close, waive certain contingencies, etc.

2. Time - Once a realtor has a sense of your style and what you are looking for, they can recommend areas and neighborhoods that you weren’t even aware of and even go look at houses while you work. This again can be very helpful in markets where you have to make a near immediate decision before it goes under contract.

3. Decipher paperwork - paperwork isn’t fun. They can help and answer questions along the way.

4. Leading Up To and Through Closing - most closings occur between 45-90 days. That can be a lot of time that passes with deadlines hidden along the way. Your realtor will stay on top of all documentation making sure deposits, inspections, mortgage items, and any other supporting documentation is accounted for.

5. No cash up front - we discussed how realtors aren’t actually free from a buyer’s perspective, but at least you don’t have to pay them up front for their services. They get paid at the time of the home closing.

No Realtor Benefits:

1. Cost savings - Going without a realtor could save you ~2.5% in fees. With home prices having risen considerably the last few years this could mean real money.

2. Use the lack of realtor to help win a property - if you’ve already identified the property you want, you can approach the seller’s agent and ask them to ‘double end the deal’. This will benefit the seller because they will pay less in fees overall and will benefit the agent who may take a small fee for representing both sides of the sale. Even when building a new home the builder often expects buyers to have an agent so you get a discount if you don’t have one.

How to Choose whether to use a Realtor

So you know the benefits of having a realtor and not, but how do you decide? For me it comes down to these main things:

1. How familiar are you with the area where you are looking to purchase?

2. How familiar are you with the home buying process?

3. How hot is the market?

If you are very familiar with the area, well aware of the home buying process, and the market isn’t red hot—you probably will be better off not using an agent. If you are less certain on any of these then you likely are better off using an agent. Personally, I have gotten more out of using an agent in the buying process than as a seller.

Ok, so let’s assume you’ve decided to use a realtor.

Where to Find a Realtor

With apps such as Zillow and Realtor.com, getting a realtor to show you a home is as simple as tapping a button. Realtors pay to have their contact information made available for different locations on different sites. Paying for leads is one of the most common ways realtors market themselves. Really the work is done for you, just read the reviews and send the automated email that is pre populated once you enter in your contact information.

Other ways to find realtors in your area are the usual word-of-mouth recommendations from family, friends, and neighbors or visiting open houses and meeting some of them in person. While word-of-mouth can be a great resource, getting to see the professional in action can help give you an understanding on how they approach their job. At times, it is possible to work with an agent who can help you find your next home and list your current home. When this happens, you can negotiate for a lower commission when acting as the seller’s agent as the realtor is going to be paid for both transactions.

Regardless of where you find your realtor, some will make you sign contracts before showing a property while others may wait until you make an official bid. Be sure to read the contract as they state the length to which you are contractually bound to working with them. This means that even if you decide to leave them and complete a transaction with another realtor, the original realtor may still be entitled to the commission of the sale. Make sure you know what you are signing and the length of the proposed contract.

Not All Realtors Provide the Same Level of Services

Ask realtors questions to get a sense for how much information they have about your specific area. And when I say specific I mean HYPER specific- oftentimes a market 15 minutes away can be totally different. So if you are looking to buy in the city don’t pick a realtor who specializes in the suburbs outside of that city and vice versa.

Get a sense for what resources your realtor has at their disposal and their experience level. Top realtors will have budgets to market your home if selling and have personal connections with sellers agents and builders from the buy side. It is great to help a friend who decided to become a realtor last week but they might not be able to do as good of a job as someone with more experience and resources.

Summing it Up

Using a realtor to buy a home isn’t free by any means but may still be worth it. Determine how much help you think you’ll need in both identifying the home you want to purchase and in helping with the buying/negotiating process. I’ve personally had success both using and not using a realtor to purchase in the past.