Paying Realtor Commissions - Why Lower Is Not Necessarily Better
Whether you are a buyer or a seller, it is important to understand how your real estate agent is getting paid. This is actually a difficult topic to tackle because there are more and more variances to realtor commission structures. I will do my best to explain how the most common structure works and other considerations when negotiating lower commissions.
Selling / Listing Realtor Commission
With the most common commission structure, a realtor charges a percentage of the sale price as the cost of their services for selling your property. For example, 7% of the first $100,000 and 3% of the balance. On a $350,000 home the cost is $17,500. This is typically split with the buyers realtor. The listing realtor gets $8,750 and the buyers realtor gets paid $8,750.
For the listing realtor, the fee has to cover all of the realtors costs to list your property: professional photographs, advertising and promotions, staging, brokerage fees (these can be as much as 50% of their commission on any sale or purchase), their time, and other general costs of doing business (gas, errors and omissions insurance, office supplies, office rental, etc.).
Buyers Realtor Commission
As I mentioned above, a buyers realtor is generally paid by the sellers realtor as part of the listing commissions they pay. In most cases, a buyers realtor is free to the buyer BUT if the seller chooses a low commission structure or no commission structure, the buyer may need to pay for some or all of their services directly.
This fee is paying the buyers realtor for their vehicle and gas costs, negotiation services, research (property, market and neighborhood), brokerage fees, their time, and other general business costs (gas, errors and omissions insurance, office supplies, office rental, etc.).
Discount Commission - Understand The Impact
Over the years, there have been many new commission structures from discount brokerages. These range from listing commissions that include no buyers agent fee or a greatly reduced amount (ex. 2% of the sale price). If you choose to sell using one of these structures or negotiate a lower fee with your realtor, it is important for you to understand some of the potential unintended consequences:
De-motivating Other Realtors - With the most common commission structure, any other realtor has as much motivation to sell your property as your own agent because the pay is equivalent. When you reduce the realtor commissions that you are paying, you are decreasing the commissions that the buyers realtor is paid and de-motivating them to sell your property.
Creating A Buyer Barrier - Buyers sign agreements with realtors at the start of their relationship to determine what they will pay them, so that they are paid for the time and expenses they put into their search. If the buyers realtor is not paid through proceeds of the sale by the seller, the buyer has to pay those costs. Many buyers will not be willing or are simply financially unable to handle those additional costs. And while they may still write an offer requesting the seller pay, they may also just move on to the next property that does not have this complication.
Less Spent On Your Listing - If you reduce what your realtor will get paid when you sell, you are giving them less budget to spend on listing your property. This could mean smartphone pictures instead of professional pictures or videos, no social media advertising budget, no staging. These are all things that improve your chance of selling faster and/or at a higher price.
Buyer Access To View Your Property - Most full-service realtors would have a key lockbox on your front door to allow other realtors access to view the property with their clients. If you do not have a lockbox and need to be home for a buyer to see a property, it can significantly limit the times available for them to view. If it is not convenient for the buyer, or they do not feel comfortable viewing the property with the current owner guiding them, they may just move on to the next property.
Experience and Expertise - service and experience should also be a factor in your decision on who to hire. Is the lower commission still getting you the service and expertise you want?
These lower commission structures can still be successful. People use these structures all the time to sell and buy. If your property is in a high demand neighborhood with little listing competition, using a discount commission may not impact you. But as we adjust to buyers having more power with higher inventory and more listing competition, it is important to understand how your realtor commission structure can improve or impede your ability to sell.
Before hiring a listing realtor, understand how they are paid, how your buyers realtor will be paid, and what services and experience you are getting in return for those fees.
Helping Your Kids Buy - Co-Signing Versus Gifting Funds
With high property prices and tougher mortgage qualifications, parents are stepping in to help their kids purchase more and more. Here are two ways they can help - acting as a co-signer and/or giving them funds for down payment, and some considerations for each.
Co-Signing A Mortgage
If a buyer does not have the income or credit established to qualify for a mortgage, a parent may be asked to act as a co-signer. When you agree to co-sign on a mortgage you are fully responsible for that mortgage. Here are some considerations for anyone considering to act as a co-signer:
Undefined length of commitment - A parent can only get off the mortgage when the lender releases them from the mortgage, which is unlikely unless the childs position has greatly strengthened. The other way to get off is to refinance, but this can only be done once there is a 20% equity position, so again it can take many years.
Responsible for payments - If the primary mortgage holder has difficulty making the payments or pays late, any delinquencies also impact the co-signers credit. The co-signer is ultimately responsible to keep the mortgage current as well, meaning that to avoid bruised credit or a foreclosure that would forever impact their ability to access financing, they would need to catch the mortgage up.
The buyers income should be able to support payments - When a parent with significant income comes onto the file, it increases the maximum amount that can be purchased. The risk to this is that it is easy for the buyer to over-purchase and end up with a payment that is more than they can afford without the co-signer contributing to the carrying costs of the property.
Impact on the co-signers future access to funds - When the co-signer tries to qualify for a mortgage or other loans for themselves in the future, lenders will take into consideration that they also need to be able to cover the carrying costs on any property they co-signed on. This can limit the amount of funds they can access in the future for their own purposes.
Gifting Down Payment
Another option parents look at is giving funds to the child for down payment. Im referring to a true gift, one that does not need to be paid back. Here are some considerations when gifting funds:
The gifter has less control - When a parent gifts funds, they will not have an interest in the property their child purchases or what they choose to do with it down the road. Because they are not tied to the property or mortgage, the child can make decisions without them being involved. If you are going to gift funds you do it with no strings attached! All mortgage lenders will ask you to sign a gift letter declaring it a true gift and you are recognizing that you have no interest in the property your child purchases.
It may reduce the impact on the gifter in the future - By not being tied to the property and mortgage, a gifter limits the future financial impact on them personally. Their credit is not impacted by any late or lack of payment on the buyers part and it has no impact on their future ability to qualify for loans and mortgages.
Give only what you can afford - If a parent will go into debt to gift down payment funds, or if it leaves them with no savings in case of an emergency, they may want to reconsider their position.
As you can see, gifting funds creates far less future ties to a childs purchase and can avoid complications down the road, which is why I usually recommend it as a preferred approach. It keeps accountability for the mortgage with the person who is actually living in the property. If someone does choose to co-sign, they should be in a very strong financial position and able to carry the mortgage they co-sign as well as their own financial obligations. And if a parent chooses to gift funds instead, it is important to let go and give those funds knowing they are trusting it in their childs hands from that point forward.
If you have questions about the options available to you to help someone purchase a home, I am happy to talk you through them.
Retirement On The Horizon? Mortgage Free Or Not - Call Me First
If you are coming up on retirement in the next few years, it is a great time to think through your mortgage needs in this next phase. It is more difficult to qualify for a mortgage when you retire, as you have less income, particularly under recently tightened lending guidelines. Planning ahead and setting up what you need before you hit retirement can make it a smoother process and save you stress and money down the road. If you have a mortgage, you could lower payments to accommodate your lower retirement income. Or, if you do not have a mortgage, you could be setting up a flexible way to access your equity in the future.
Refinancing To Lower Your Payments
People often think of refinancing as a solution to reducing their interest costs and consolidating debts. While this is one reason people consider refinancing (breaking your current mortgage and setting up a new one with new terms), lowering payments is another top reason to restructure your mortgage. If your income in retirement is going to drop significantly, it may make sense to push out your mortgage and drop the mortgage payments to accommodate it. I often do this for people who have the investments to actually pay off their mortgage completely. When they look at the tax ramifications to withdraw and the loss of interest on those investments, they choose to keep their mortgage because it costs them less than cashing out.
Example: You have a $150,000 mortgage currently at a 5-year amortization. Your monthly payment at 4% is $2,760. If you refinance to push this out to a 15-year amortization, your monthly payment at 4% is $1,107. Your monthly cost drops by $1,653!
Mortgage Free? Set Up Easy Future Access To Home Equity
It is often those who have been mortgage free for some time who do not prepare ahead with an easy way to access their equity. It is usually because they have been financially strong enough that they have never had difficulty getting loans or financing. With homes at such high values and so much of your net worth tied up in one, I highly recommend setting up an easy way to access the equity should you need it in the future and before it becomes more difficult to qualify on a fixed income. The easiest way to do this is to set up a significant Home Equity Line of Credit (HELOC). It can provide many great benefits in the future:
Bridge financing on future purchases - If you choose to downsize and want the flexibility to buy before you sell, this provides a built-in way to pull out the funds you need to buy. It allows you to avoid the stress of moving twice and of course avoid you needing to be approved for a mortgage while on a lower, fixed income.
Home repairs and maintenance - Once on a fixed income, you may find it difficult to manage an unexpected bill for a large home maintenance item such as a furnace or roof replacement.
Supports to age in place - If drawing on your equity allows you to afford the supports you need to stay in your home longer (ex. nursing and other home care supports, lawn care, snow removal, cleaning services), it can be far cheaper than being forced to move into an assisted living facility at a significantly higher monthly rent amount.
Already Retired? There Are Still Options
If this newsletter comes a bit too late and you are already into retirement, there are still options that can help you. Your pension income can be used to qualify for a mortgage (although it may be less of a mortgage), so you may still qualify for traditional lending, whether for a downsize purchase, restructuring to lower payments, or for a HELOC.
If you do not qualify for traditional mortgage lending, there are other options you can consider. One of these is a reverse mortgage. These have a bad reputation because products by the same name sold in the United States have all sorts of terrifying terms and conditions. The reverse mortgages available in Canada are only offered by two lenders, both banks, both highly regulated, and with the safeguards to make them a reasonable and safe option for seniors who own their home but find themselves short on the funds to stay in it.
Reverse mortgages do have higher interest costs than a standard mortgage or HELOC, but they also do not require payments, which can be a huge factor on those with a fixed income. And again, when comparing those costs to the cost of being forced to move into a higher-cost living situation, a reverse mortgage can make a lot of sense. Ill talk more about this product in a separate newsletter.
Before you hit retirement contact me to discuss whether there are any mortgage changes you should consider. If you are already retired and want to discuss mortgage options that can help meet your needs, I can help with that as well.