Unfortunately, some real-estate pros profit at your expense. Here are 5 murky areas to be aware of when buying a home, and 21 tips for protecting yourself and turning on the lights.
By Marilyn Lewis of MSN Real Estate
5 ways homebuyers are kept in the dark (© Paul Edmondson/Corbis)
Buying a home is complicated. Buyers can’t possibly understand all the rules and procedures, so they depend on trusted professionals to guide them through decisions worth hundreds of thousands of dollars.
But as the subprime debacle vividly demonstrated, those professionals sometimes put their own interests ahead of homebuyers’ needs. Flaws in the system — including hidden incentives, complicated rules and confusing disclosures — let opportunistic agents, lenders, inspectors and others profit at your expense.
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Even worse, you may be completely unaware that you’re being victimized. Here are five murky areas where you should pay close attention, along with 21 tips for drawing back the curtains.
1. Home inspections from agent-referred inspectors
Home inspectors typically get their work from real-estate agents, and homebuyers seldom consider the problems with using an inspector recommended by an agent. This relationship, however, is one of the darkest corners of the real-estate business.
Why you’re in the dark
Some agents — by no means all — pressure home inspectors to turn in a “good” report, says Barry Stone, a home inspector in San Luis Obispo County, Calif. In his syndicated column, “The House Detective,” he has called the agent-inspector relationship “a clear conflict of interest.”
Here’s why: Real-estate agents don’t get paid unless a home sale goes through. A pre-sale home inspection that uncovers problems can be the kiss of death to a sale. At the least, the sale is slowed down.
“Realtors constantly make these hints. They’ll say, ‘It really matters to me to close this deal,’ ” Stone says. “They won’t come right out and tell you that they don’t want you to disclose everything, but they’ll hint at it.”
Salespeople may complain that an inspector is “too nitpicky” and stop sending him business. “Or they just won’t use you for a real long time and then you’ll run into them and they’ll say, ‘I’d like to use you but you really scared the buyers,’ ” Stone says.
Though agents have told Stone he’s a “deal killer,” he says he ignores the pressure and discloses everything he finds, keeping in mind that the buyer — his client — has lots to lose by purchasing a home with hidden problems. And he keeps a sense of humor. His van’s new license plate reads DEALKLR.
How to turn the lights on:
* Look for someone who takes his time. A thorough inspection takes three hours or more. Stone does only two in a full day’s work. One inspector, who didn’t want his name used for fear of reprisals to his business, says he’s heard a few colleagues at conferences say they do 30-minute inspections. They apparently expect to make enough additional money to more than cover the costs of fixing any problems that homeowners discover later and ask them to pay for, he says.
* Shop around. Stone suggests calling several agents’ offices, asking each who the pickiest inspector in town is. Read “4 tips for finding the best home inspector.”
* Speak up. Home inspection is not science; even great inspectors can miss defects. If you think your inspector made an error, call and ask him to re-evaluate. With smaller defects, “if the home inspector has integrity, he will take it on himself to offer to pay,” Stone says. For major errors and omissions, licensed inspectors carry professional liability insurance
It can be hard to legislate solutions to such systemic conflicts of interest. Similar concerns about appraisers — that lenders were pressuring them to inflate home-value estimates — recently led to a revised federal Home Valuation Code of Conduct. But the rule changes created an unanticipated new set of problems as appraisal management companies sprang up to assign and broker appraisals. Now critics (many are appraisers) complain that the companies inflate buyers’ costs and encourage slapdash appraisals, and Congress is considering suspending the new code. For now, there’s no similar move afoot to regulate the agent-inspector relationship. So a consumer’s best insurance, Stone says, is to find a competent, ethical inspector.
2. Dual agents
Most states allow a real-estate agency — sometimes even the agent herself — to represent both buyer and seller in the same transaction. This is known as dual agency.
Why you’re in the dark
Many real-estate agents with great integrity insist they can give both sides their loyalty and confidentiality. Or, if a conflict arises, they’ll step aside and ask a colleague to assist you.
But critics call it a conflict of interest. What happens when a buyer instructs the agent to get the lowest possible price and the seller of the house tells the same agent to get the highest possible price?
Also, confidentiality is at risk. That risk exists even if real-estate agents simply work in the same agency, says John Sullivan, a Realtor and president of the National Association of Exclusive Buyer Agents: “You’re using common fax machines and office equipment. There are just too many instances where your information is subject to being disclosed.”
Traditionally, real-estate agents worked only for sellers. Today, state laws, which vary widely, govern agent-client relationships. (Find your state’s real-estate commission and read the laws and rules at the Association of Real Estate License Law Professionals.)
The National Association of Realtors’ code of ethics requires full disclosure from agents and informed consent from buyers when a member represents both sides. Also, states usually require agents to disclose that they are working for both sides and to get your consent in writing. Nevertheless, in a 1997 sting, investigators from the Massachusetts Office of Consumer Affairs found that every one of 45 offices they visited violated the state law requiring disclosure.
How to turn the lights on:
* Watch your tongue. Don’t discuss your financial position, negotiating strategy, moving timetable, reasons for buying or other confidential information unless the agent works for you alone.
* Ask questions. Before agreeing to be represented by a dual agent, ask, “How will you represent my interests if you also represent the seller of a house I want to buy?” Carefully interview agents before hiring. If you agree to dual agency, you’re giving up your right to your agent’s undivided loyalty. Learn about types of agents here and read “Find a superstar real-estate agent.”
* Use an exclusive buyer’s agent. There’s a small but growing movement of agents who work only for buyers. One place to look is the National Association of Exclusive Buyer Agents, a trade group whose ethics code requires members to be loyal to buyer clients only.
* Consult a lawyer. If a problem arises, consult a real-estate attorney. Call your state or city bar association for a referral or use FindLaw’s locator service.
* Negotiate a commission reduction. Since you’re getting less service — dual agents, for example, are often prohibited from advising you on price — it makes sense to pay less.
* Switch agents. Many agents will release a truly unhappy client from a contract, but if your contract covers the possibility of dual agency, you may be stuck. You can, however, request to be assigned to another member of your agent’s team, lessening (but not eliminating) the problem.
3. Agent incentives
With the flooded home market these days, some sellers are offering to give agents incentives — cash, cars, trips and other prizes. They figure that agents are more likely to show their property when there’s something in it for them. Also, agents often can earn a bonus from their own agency for selling one of the agency’s listings.
Why you’re in the dark
The trouble here is not bonuses, but the lack of disclosure. You deserve to know your agent’s motives in selecting properties to show you and giving guidance on what to buy. The NAR ethics code requires agents to put clients’ needs ahead of their own. But agents aren’t required to disclose bonuses and incentives until the last minute, on your HUD-1 statement. Noncash prizes and trips need not be disclosed.
How to turn the lights on:
* Demand disclosure. Ask your agent to agree to tell you if a property has incentives or bonuses attached.
* Craft an agreement that benefits you. Write a clause into your agent agreement that any bonuses or incentives attached to a property you buy go directly to you.
4. Expensive lender-pushed loans and fees
Most predatory loan products of the subprime era — the option-only ARMs, liars’ loans, interest-only loans and the like — are gone, at least for now. Banks no longer are offering them. But one predatory practice lives on: Lenders don’t have to tell you if you deserve a better interest rate than they’re offering.
Why you’re in the dark
Brokers earn a commission (called “yield spread premium”) on loans they sell. Some loans offer higher commissions than others. That’s why, although your credit may qualify you for a 5% interest rate, a broker might try to sell you a 6% loan. Even the Federal Housing Administration’s home loans offer lenders such incentives, says Bruce Marks, CEO of the NACA (Neighborhood Assistance Corporation of America), a homeowners advocacy agency.
How to turn the lights on:
* Shop around. You won’t know if you can get a better rate unless you apply with several lenders. Also, let a lender know that you’re comparison shopping. That tends to encourage more competitive offers. “There’s a perception out there that when I go out to a broker or lender, that interest rate is fixed, nonnegotiable. That’s not true,” Marks says.
* Be a skeptic. Understand that bankers and mortgage brokers are salespeople, probably working on a commission. “We have learned that you have got to shop around and don’t trust what they say,” even at the biggest banks, Marks says.
* Choose lenders who disclose their fees: Ask mortgage brokers to tell you, in writing, the wholesale cost of the loans they’re offering in addition to what they’re charging you. Keep shopping until you find professionals who will do this.
5. Last-minute changes to your mortgage
When your loan closes and you’ve got the pen out to sign, your lender can surprise you with changes to the loan you’ve been offered. Because of this, buyers don’t have time to do meaningful comparison shopping.
Even the savviest consumers get snared. Deb Bortner, director of consumer services at Washington state’s Department of Financial Institutions, tells how she became a victim 20 years ago when she was a new lawyer buying her first home. When she showed up to close the deal, her broker produced not the 30-year, fixed-rate loan she’d been promised but an entirely different mortgage, with a balloon payment requiring her to repay the whole amount in one year. The broker’s excuse: Her older cottage didn’t qualify for the better loan. Intimidated, Bortner says she shrugged and signed anyway before refinancing the following year.
It can happen to anyone. Bortner tells her story to make a point: If you don’t understand a deal, just walk away.
Why you’re in the dark
When you shop for shoes, you can see the price, size and product features marked clearly on the box. The price won’t change between the shelf and the checkout stand. But it’s typically hard to understand costs and terms of a mortgage, and they can change between the lender’s initial and final offers. Unscrupulous lenders and brokers take advantage of the confusion by inserting junk fees and overcharging or double-charging for services.
The government requires that costs be revealed on disclosure forms. But the forms are dense and complicated. Last-minute changes can be hard to spot. A 2007 Federal Trade Commission study found many borrowers were confused by the disclosure forms. It made no difference whether the subjects were savvy shoppers or not, subprime or prime borrowers or whether the loans were simple or complex: 50% of the people tested couldn’t even find the loan amount on disclosure forms; 32% couldn’t identify the interest rate; 30% couldn’t tell if a balloon payment was required and 87% couldn’t find the total fees charged.
How to turn the lights on:
Starting on Jan. 1, 2010, lenders will have to use a new, simplified good-faith estimate that clearly shows loan costs. The Department of Housing and Urban Development expects the form to save consumers $700 on average. The form also is easier to compare with the HUD-1 form, making it easier to track costs and making it harder for lenders to insert stealth fees at closing. The theory is that you’ll be better able to comparison shop because lenders will be forced to show their hands — with very little room for change — in the good-faith estimate.
What’s your home worth?
Lenders also will be forbidden from pulling last-minute surprises. If it turns out that you’re ineligible for the original deal offered (maybe you lost your job, or your house didn’t appraise for what you’d hoped), the lender must start again, making a new offer and fresh disclosure. Otherwise, no changes are allowed except for a couple of categories of fees for services (like title insurance) provided by third parties. See changes to the Real Estate Settlement Procedures Act.
These changes should put the consumer in a better position, but whether they eliminate sneaky lender tactics will have to be seen.
Until January, you can turn the current less-than-ideal situation to your advantage by following these steps:
* Line up a trusted adviser in advance to help review loan offers. You’ll have seven days to consider each offer. Arrange ahead of time with a knowledgeable friend or relative to help you compare the competing offers. Or use a free or low-cost consumer credit counselor (learn how to find one here) or HUD-authorized housing counselor.
* Apply with several lenders or brokers at once. This way you’ll have competing offers to choose from. Except for a small fee to pull your credit history, lenders can’t charge you for applying. Neither brokers nor direct lenders are necessarily shopping for the best deal for you. They’re likely to present deals that will make them the most money.
* Get it in writing. Don’t rely on oral promises. After you apply, each lender has three days to produce two disclosure documents:
1. A “good-faith estimate” should lay out the costs of the loan offer, including insurance, reserves, pest inspections, loan fees, credit fees, appraisal fees, recording fees, title-search fees and other settlement fees. It also shows a loan’s out-of-pocket expenses and monthly mortgage payment.
2. The federal “truth in lending” form (here’s an example) summarizes the loan offered, including fees, closing costs, loan amount, total number of payments, annual percentage rate (APR) and total dollars you’ll be spending over the life of the loan.
* Compare offers. Review the disclosures with your adviser, focusing on the APRs. Like unit pricing in a grocery store, the APR combines all of a loan’s costs, including interest, for an apples-to-apples comparison. Screen out lenders whose estimates reveal unusual, unexplained or hidden fees or charges. “With the good lenders, it’s all very clear what you’re getting,” Bortner says. If it seems you’re getting the runaround or if you’re confused by an offer, keep shopping.
* Request a preliminary HUD-1. Your lender will set a date for the loan to close (to sign the loan contract and settlement documents). You have the right to see your HUD-1 form, showing the costs and terms of your loan, 24 hours before your closing. (Here’s a HUD-1, at the Department of Housing and Urban Development). The preliminary HUD-1 isn’t required to be complete or accurate but it’s worth getting so you can compare it with the earlier disclosures and look for discrepancies. Most lenders won’t offer it, so ask for it.
* Prepare for surprises. The numbers and terms on your final HUD-1 could differ from your preliminary disclosures, and, wouldn’t you know it, the changes are almost invariably in the bank’s favor. It’s up to you and your adviser to decide how much difference you’re prepared to accept. Rule of thumb: Any change in the APR between the preliminary and final documents is a bad thing.
* Be ready to walk. You’ve put a lot of time and effort into getting this far, so it’s not easy to walk away from a closing. But remember Bortner’s story and don’t be afraid to leave if you must.
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