Updated: Mar 1, 2020
"First Time Fixer Upper" is a seven part series on buying and financing your first rehab project, with new posts published weekly in January and February 2020.
If becoming a homeowner is part of your 2020 vision, you’re going to need two key aces on your team to get you there: your realtor and your lender. This week in the First Time Fixer Upper series, I’ll explain everything you need to know about choosing the first key player: your realtor, also known as a real estate agent. In fact, if you are planning to take on a fixer upper project, the rules are a little bit different, so we'll look at those differences as well.
Realtor basics: who pays the buyer's agent?
First of all, do you even need a realtor, or a real estate agent? Don't you have to pay them, and can't you just look at properties yourself to save money? Sure, you can look at properties yourself, represent yourself in negotiations with the seller's agent, and handle all the paperwork yourself. But as the buyer, there's really no incentive for you to go it alone in a property purchase transaction, because in almost all cases both the seller's agent and buyer's agent are compensated from the proceeds paid to the seller as a percentage of the purchase price you agree to pay for the property. Technically, both agents are paid from money you are putting into the deal, but this ultimately results in a deduction off the seller's profit rather than an increase to your price. The only time the buyer is responsible for paying their own agent is if the property itself is not listed with a buyer's agent commission or if it listed for sale by owner. In this case, the seller is trying to "save money" by skipping out on the agent commissions, which typically just results in both agents and buyers skipping their property.
This is actually a really key point to understand, because the very nature of this transaction means that the more you pay for a property, the more your realtor (known as "the buyer's agent") is compensated at closing time. While you, as the buyer, are naturally motivated to get the lowest price and the best deal, the buyer's agent will be paid less as the price comes down. This does not mean that all realtors are trying to get you a bad deal or keep the price high, and in fact I've met very few that operate that way. A really good agent knows that finding and negotiating excellent value deals for their buyers means that those buyers will be happy with their purchase and refer them to others, resulting in more deals for the agent and eventually opportunities to serve those same buyers again when they become sellers. Good business results in more good business, and the best way to make money as an agent is as a seller's agent, where both the buyer and the agent are equally motivated to negotiate the highest price on the deal.
Here's where it gets tricky. Buying a move-in ready home at $300k is not the same as having a $300k budget for a fixer upper rehab project. In the first case, your agent will show you homes priced around or slightly below your budget, and make 2.5-3% of the purchase price on the deal at closing (typical range for agent compensation), paid out of the seller's proceeds. If, however, you decide along the way that you want to buy a fixer upper for $150k and put $150k into repairs and renovations, your agent will only be compensated as a percentage of the purchase price of the property, not the total budget for the project.
This is one of the reasons why it is important to know going in whether you are looking for a move-in ready home or a fixer upper project, so that you can set expectations with your realtor right up front. If you're not sure, be sure to check out last week's post to help you decide whether you're open to a rehab. Some realtors specialize in finding properties for real estate investors, who tend to look for below-market-value properties so that they can get the best returns in either a "fix and flip" or "buy and hold" strategy. Be sure to ask any realtors you're considering whether they typically work with investors and can help you target these types of properties.
Despite your best efforts at knowing what you want right away, some of you will inevitably change your mind as you go through the house shopping process. The more homes you tour, the more you will become certain of which key characteristics are important to you and which ones are deal breakers or can be overlooked. As you become more confident in both your requirements and your knowledge of house anatomy and repairs, you may very well find that you feel more confident in your ability to handle a fixer upper project as well and begin to shift your target. If this happens, it's completely okay! Just be sure to communicate this to your realtor and be sure the two of you are on the same page with your goals. This happens all the time, and most realtors have no problem working with you to find the right property that meets your goals.
What's NOT okay is if your realtor continues to only show you higher priced properties and effectively ignores your request to look within a lower price range to accommodate repair costs. With one of my clients, I was brought on during the property search process to participate in walk-throughs and noticed that her realtor was only showing her properties that would put her total project budget after repairs well outside her stated mortgage qualification. When I began searching for properties which met her criteria myself, I found a number of lower priced properties in need of more repairs that her realtor simply was not even showing her!
If this is happening to you, its time to let your agent go and politely move on. Yes, you probably signed a buyer's agent contract, but buyer's agent contracts can be terminated if you can show cause that the agent has breached the contract, or with the agent's permission. If you point out that their motivations are not aligning with yours, they will most likely be more than happy to let you go. In the case of my client, I referred her to one of my partner agents that I work with on a regular basis, and we were able to get her under contract on a great rehab deal with a renovation loan in just a couple of weeks.
Why use a realtor anyway?
Now that you understand how your agent will be compensated, let's look at the benefits of having an agent in general. First and most obviously, a buyer's agent has access to both the MLS (multiple listing service) and pre-market deals that may be listed soon through another agent in their brokerage. They can get you access to properties, and will search for properties on your behalf based on your budget and criteria. Agents are inherently great networkers, so they will also likely know when homes are about to be listed by sellers in their network.
Second, realtors are in tune with the pulse of the market. They deal in buying and selling homes across multiple price ranges and in neighborhoods across your city, so a good agent will have an excellent understanding of the going price point for a certain type of property in a given area. In effect, they know what a good deal looks like, and can help you as the buyer evaluate the right price for an offer regardless of the list price. They will also have an excellent understanding of likely resale value in a given neighborhood, and they'll know exactly which neighborhoods are up and coming, up and came, or better left alone. As you work with them and tour more properties, they will share this knowledge with you and you will be able to confidently make a strong offer on the right deal when it comes.