How to Buy a House home
Learn the basics
1.The Basics
2.How much home can you afford?
3.The Monthly Payment
 (w/Taxes & Insurance)
4.The Down Payment
5.The Loan
-Assuming a Loan
-Owner Financing
6.Qualifying for a loan
7.Understand Closing Costs
Do the groundwork
8.Get your finances in order
9.Check Your Credit Report
9a.Repair bad credit
9b.Establish Credit if you don't have any
The Process
10.Find a Lender
11.Evaluate the bank's offer
12.Decide whether to use an agent
13.Learn about the suburb penalty
14.Start looking at houses
15.Get the Disclosure
16.Make an offer / Sign a Contract
17.Have the House Inspected
18.Problems on the Inspection?
19.Renegotiate the terms
20.Appraisal & Insurance
After the purchase
Avoding scams
More about Mortgages
How much loan can you get?
15- vs. 30-year loans
Prepaying your mortgage
How to figure mortgage interest
Private Mortgage Insurance
Paying Points
If you won't live long enough to pay off the mortgage
Other Topics
Renting vs. Buying: Which is better?
Glossary of Real Estate terms
Homebuyer Tax Credit
Buying is an investment
Paying cash vs. getting a loan
The Debt Ratio
Tax breaks are actually welfare for the rich
Links to helpful sites
Fan Mail
Michael Bluejay's home page
Email Me
This site is used as a homework reference in: Stoughton High School (Pat Schneider's economics class)

How to Buy a House

As seen in BusinessWeek and Realtor Magazine
a free 39-page guide by Michael Bluejay

Decide whether to use a real estate agent

Once you've been pre-qualified you're almost ready to start looking at houses.  Before doing so, you have to decide whether to use a real estate agent or not.  If you use an agent, that agent will offer lots of help, advice, and explanations throughout the homebuying process.  But if you don't use an agent, you can potentially save 3% of the cost of the home, as we'll explain below.  It's a tough decision.  Most first-time homebuyers would probably do well to use an agent.  If you've purchased a home before, or you're really confident in your ability to follow everything on this website carefully, you might be able to get by without an agent.  The rest of this page will help you make your decision.  First, let's learn some terminology so we know what we're talking about.

The difference between agents, brokers, and realtors

The nuances between these terms isn't terribly important, and if you like you can skip this section.  Whoever represents you or the seller, you can refer to them as "agents" and be safe.  If you'd like to know the details, keep reading.

All real estate salespeople are agents.  They're licensed to represent either buyers or sellers in property transactions.  There are basically three flavors of agents:

  1. Regular agents.  They have no additional training or professional memberships.
  2. Brokers.  They generally have more education and training than regular agents.  But they're still a kind of agent.
  3. Realtors.  These are agents who belong to a special professional association of agents.

Realtor in Austin, TX

If you're in the Austin area, I recommend you use Kimberly Tortorice as your agent.  She's competent, hard-working, and most importantly, honest.  Real estate agents generally aren't my favorite kind of people, but Kimberly is a rare exception.  If you need help buying your home, and especially if you're in any way nervous about the process, then call her at (512) 731-7962 and rest assured that you'll be in very good hands.  (Note: This is my personal, unpaid, unsolicited endorsement. -MBJ)

A common mistake is to refer to all agents as Realtors, but actually it's the other way around:  all Realtors are agents, but not all agents are Realtors.

Note that a broker can be an individual or a company.  Often, an agent works for a broker.

When shopping for an agent, it's not important to look for one kind of agent over another.  In theory brokers and realtors might have more skill than regular agents, but it really depends on the particular agent in question.  If I were shopping for an agent, I wouldn't pay any attention to what flavor of agent they were.  I would pay more attention to positive reviews on Yelp and other places.

How much do real estate agents charge?

Your agent's fee is paid by the seller.  So it seems like your agent is "free" to you.  In reality, if you don't use an agent, then there's no agent for the seller to pay, so you might be able to negotiate a reduction in the sales price by the amount that the buyer's agent would normally get.  (More on that below.)

The seller's contract with her own agent specifies how much she'll pay that agent, usually 6% of the purchase price.  The seller's agent then typically shares half of that with the buyer's agent.  So, each agent usually receives 3%.  (The agent might then have to pay 0.5% to 1% to their broker, if they're working under one.)

But the 6% fee paid to the seller's agent isn't set in stone.  Some sellers get a discount agent who receives only a flat fee.  Other sellers sell without using an agent at all.  That's called FSBO—For Sale By Owner.  Such sellers might or might not offer a commission to buyer's agents to bring qualified buyers to the table.  And if such sellers don't offer a fee to buyer's agents, then buyer's agents aren't going to tell their clients about those houses.

Save 3% by being your own agent

You might expect that sellers' agents would automatically reduce their fee from 6% to 3% when there's no buyer's agent.  You'd be wrong.  Sellers' agents are usually happy to keep the whole 6% for themselves unless somebody starts asking for a reduction.  And in fact, even if asked, many sellers agents won't agree to lower their commission when there's no buyer's agent, simply because they're not legally obligated to.  So you actually have two hurdles to cross:  You have to first get the seller to agree to reduce the sale price by 3% if they can get their agent to reduce their commission from 6% to 3%, and then the seller's agent has to agree to reduce the commission.  So getting the 3% reduction isn't a slam dunk.

Still, it doesn't hurt to ask, and it very often works.  Just point out to the seller that it won't cost them anything to lower the price if the commission is reduced, since the seller is going to be paying that 3% either way.  And point out that the seller's agreement to your request is what gets you to sign a contract and buy the home, which is what the seller wants.

If you go this route, make sure to get this concession before you sign a contract.  After you've signed a contract and don't have any outs, it's too late.  The seller's agent has no obligation to part with the extra 3%, and if the contract has already been signed, they likely won't.

Benefits of using an agent

In the past, one of the main advantages of using an agent was that an agent could find potential homes for you by searching MLS, a database of all houses for sale that are listed by other agents.   But this is not the big advantage that it used to be, since in most areas you can now search MLS on the Internet yourself.

The next important thing your agent can do for you is to give you a professional opinion about how much a given house is really worth. This can help you avoid paying too much for a house.  You might worry that the agent has a conflict of interest, since they typically get paid 3% of the sales price, and so the more you pay for the house, the more the agent makes.  In reality this is not so much an issue, because inflating the price a lot would net an agent only a little extra commission.  (For example, inflating the sale price by $10,000 would net the agent only $300 extra.)

Next, an agent can help you negotiate the price.  In fact, they'll make a recommendation to you as to how much you should offer, and whatever price you agree to, the agent will then handle all the negotiations themselves, so you don't have to get your hands dirty.

Finally, an agent can guide you through the contract, and make sure you're not getting ripped off on closing costs.


Advantages of not using an agent

The biggest advantage of not using an agent is that you might be able to negotiate a 3% reduction in the sales price, as explained above.

Most agents also won't tell you about houses that are For Sale By Owner (FSBO).  If a private individual is selling his/her house without using an agent, then the house won't be listed in MLS, since only agents can enter houses into MLS.  Sellers often choose to sell by themselves because then they won't have to pay the 3% commission to their own agent.  A FSBO seller might still pay the 3% commission to the buyer's agent, in order to get agents to tell their buyers about the property.  But if they don't, you won't hear about that house from your agent, since they can't make any money from the sale if you buy it.

So the potential advantages of not using an agent are the possibility negotiating a lower price with the seller, since the seller won't have to pay a commission to the buyer's agent, and the ability to find FSBO's.  But these advantages exist only if you take advantage of them. If you don't actually try to negotiate a lower price (or you're not good at it), or make no effort to find FSBO's in the first place, then you're not getting the benefits of not using an agent, and you might as well use one.  And remember, if you do go it alone without an agent, it will still be up to you to look for houses in MLS (if available to you) and to a professional estimate of value for each house you're interested in.  We'll cover that further down.

Should I use an agent or not?

Only you can answer that question for yourself.  And everything you need to know to make your decision is listed above.  Let's summarize it again here though.

With an Agent
Without an agent

Agent can find houses for sale in MLS.

You'll have to find the houses yourself. If MLS is available to the public in your area, great. If not, you might not be able to find much. Check the list above for tips on finding homes for sale by yourself.

Agent can give a professional opinion of how much a home is worth. But the agent has an incentive to inflate the price, because the more you pay for the house, the bigger commission they make.

You'll pay someone for a professional opinion of value -- either a CMA from an agent for ~$75, or an appraisal from an appraiser for ~$400.  (See the next section about how to avoid paying for the appraisal twice.)  You can get a free estimate of a home's value at the websites listed below, but I'd be wary of making an offer based on a free, computer-generated estimate of value.

Agents won't tell you about FSBO's unless the seller is paying a commission to realtors. In fact, some agents won't tell you about FSBO's even if the seller is paying a commission, because the agent might not want to go through the hassle of finding out whether the seller will pay a commission.

Every FSBO is an option for you, but you'll have to find the properties yourself. Look at the ads in the newspaper, and ride around the neighborhoods you're interested in, looking for yard signs that say "For Sale By Owner".

Agent will be paid by the seller, usually 3% of the price of the home.

With no agent the seller won't have to pay that commission, so you might be able to negotiate a lower price with the seller.

Whether or not you use an agent, all the papers for the sale are handled by and signed at the office of a title company, which makes sure (among other things) that the home is really the seller's to sell, and that there aren't any outstanding claims against the property.  If you want further protection, you can hire an attorney to check the paperwork, though most people don't opt for this.  I've never done it myself.

Buying a house without using a real estate agent

Realtor in Austin, TX

If you're in the Austin area, I recommend you use Kimberly Tortorice as your agent.  She's competent, hard-working, and most importantly, honest.  Real estate agents generally aren't my favorite kind of people, but Kimberly is a rare exception.  If you need help buying your home, and especially if you're in any way nervous about the process, then call her at (512) 731-7962 and rest assured that you'll be in very good hands.  (Note: This is my personal, unpaid, unsolicited endorsement. -MBJ)

If you choose to work without an agent, the first thing you'll need to do is to find a house you want to buy.  Start with a web search for "[your city name] MLS".  For example, here's the MLS for Austin, Texas.

Also, look for FSBO's in newspaper classifieds and on websites like For Sale by Owner.  Your agent typically won't tell you about such houses, for two reasons: (1) They're usually not listed in MLS, so your agent has no idea they exist, unless they start pounding the pavement looking for them, which they have no incentive to do because (2) usually the agent can't make much or any commission on an FSBO.  Sellers who go the FSBO route are doing so in the first place so they don't have to pay agent commissions.

Once you've found a house you like, you need to find out how much it's really worth so you don't pay too much for it. You can hire an agent to perform a Competitive Market Analysis (CMA) of the property, which usually costs around $75.  The CMA will compare the house to other similar houses in the neighborhood which have sold recently, and their sales prices.  Most agents will offer to prepare a CMA for free in hopes of getting you as a client, so if all you want is the CMA you should make it clear that you're not interested in having them represent you, and that you prefer to just pay their fee.

An alternative to getting a CMA from an agent is hiring an appraiser to provide you with an estimate of value.  The appraisal will be much more detailed and probably more accurate than an agent's market analysis, but it will cost more, too (~$400).  You'll have to get an appraisal anyway if you actually decide to buy the house, whether you use an agent or not, because your lender requires an appraisal, and they make you pay for it.  The bank will want to use its own appraiser, so find out whom your bank uses so you can use the same appraiser, so you don't have to pay for the appraisal twice.

Still, the CMA probably gives you enough info to base an offer on, and if you follow my contract page carefully, you'll have the ability to back out of the contract if the appraisal later shows that the house is worth a lot less than you offered.

There are websites will give you a free estimate of how much a given house is worth, using a combination of recent sales data and property appraisal records, and they're often fairly accurate, but I don't consider them sufficient by themselves to base an offer on.  They're good to use to get a rough ballpark idea before you buy a CMA or appraisal, but they're no substitute for the real thing.  Do not base your offer on a free web-based estimate of value!  Anyway, here are the free sites where you can get a general idea of value:

    • Yahoo Real Estate. Shows you the results from Zillow and eppraissal on the same page.
    • Zillow. The Wall Street Journal said Zillow came within 5% of the market price in about a third of cases, was off by 25% or more in 11% of cases, and was off by 50% or more in 3.4% of cases.
    • Finds Comps Now.  In addition to estimating a home's value, it also automatically shows you how much nearby homes sold for.
    • eppraisal. Also provides demographic info about the neighborhood.
    • Real Estate ABC. Lets you pick and choose which comparable houses in the neighborhod to use in estimating the value of the target house.
    • Others. Money Saving Expert lists a ton of house valuation sites.

After you've decided whether to use an agent, it's time to start looking at houses!

Amount spent so far.   Red items apply towards the purchase. Amounts are typical, not exact.


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Last update: March 2014