Settlement shenanigans

The Thinker by Rodin

Having recently completed a half-million dollar transaction (the sale of our house) I have been pondering the HUD-1 form we got at settlement. This is a standard form issued by the settlement agency that indicates all the costs of the buying and selling transaction. If a form could stink, this one would stink, at least a little.

Clearly commissions cost money, and the seller typically pays the commissions, both for the listing agent and the buyer’s agent. Traditionally this was six percent of the sale, split equally between agents. In recent years most realtors seems ready to bargain with sellers, perhaps because home prices are so inflated now. 5% is probably typical these days. Some sellers bargain for 4% and probably wonder if they get the same quality of service for this price. Some may get less than that. Our listing agent said she would take 2% in commission, so we agreed to pay 5%, with the buyer’s agent getting 3%. More than once I raised the fairness issue with our agent. She did most of the work and got 2% while the buyer’s agent earned more. She shrugged. That’s the way it goes. She often acts as a buyer’s agent and comes out ahead in those transactions.

Anyhow, the HUD-1 lays it all out. Since we sold the house for $505,000, our agent got $10,100 and the buyer’s agent got $15,150. Nice money if you can get it. But the buyer’s agent didn’t get $15,150. Unknown to us until settlement was the figure in the buyer’s column on Line 205. It’s called “Realtor credit” and it showed $7,000. This is money that the buyer’s agent will give back to the buyer for the privilege of being their agent. So she really got $8,150 from us for the sale of our house, and gave $7,000 of her $15,150 to the seller.

This means in effect that the buyer bought our house for $505,000 but really paid only $498,000 for the property. And this was because we were not savvy enough in the real estate trade to know we should try to discount the commission because the buyer would get a kickback, sorry a credit from his agent.

I am at once upset about this and wanting to shake our buyer’s hand. He’s one crafty dude. It’s not just us whose pocket he picked without us even knowing. He also got a kickback, sorry a credit from his lender (line 204), for $1000. Yes, for the privilege of taking out a loan with PrimeLending of Dallas, Texas, they gave him $1000 at settlement, which means in effect he paid only $497,000 for our $505,000 house. To the buyer’s credit, he did put 22% down in cash and financed the rest. Perhaps that had something to do with the credit.

Of course neither my wife nor I at any time knew we were effectively giving $7000 to the buyer. There was no piece of paper with the offer that said anything about this at all. Maybe there should be. We had two competing offers on the table, both for full price. Maybe we would have accepted the other one had we known. Or maybe we would have countered and asked for a credit from the buyer too. We could have asked for a higher asking price, of course, I just didn’t know these details.

What’s missing is transparency. These credits/kickbacks really affected the entire real estate purchase. Without them the buyer might not have made us an offer, or perhaps he would have raised his offer. We were just in ignorance.

The buyer’s agent just happens to be the top selling agent at our agent’s office. She has found a profitable niche. You see she is Indian and caters to the Indian community. Asians including many Indians are rapidly moving into our former zip code. I looked up the census data, and Asians went from 15% to 30% of our population between the 2000 and 2010 census, so it’s a growing market. There’s nothing wrong with this of course. Indians are likely to ask around mostly inside of their community when looking for an agent. Most likely they heard about her and heard that she offered generous credits on her commissions. In this case, it was a very generous credit, as $7000 is 46% of the money she could have gotten from us if she hadn’t kicked it back.

What she does get to do is to count the $505,000 sales price of our former house to her yearly sales total. It helps make her the #1 agent in that office. Doubtless nowhere in her marketing material is she calling attention to the fact that while she was one of two agents in the sale, she effectively earned a commission of 1.6%. So our agent really made more from the deal. The effect of our sale was that 3.6% was paid in commissions, but we were charged a 5% commission. We apparently gave the buyer a 1.4% rebate, but it’s not listed anywhere. The HUD-1 form at least provides this transparency; it just came too late to be useful.

I’m unlikely to do many more house sales in my lifetime. But if there is a next time I will be more wary. I will relate my experience to my new agent and suggest because we were effectively discounted, maybe 2% for each agent is appropriate. At least that way the buyer pays a higher percentage of the actual house sale, which will end up in our bank account. What I really want is all these details in the offer up front. I know I’m probably Don Quixote pointing my lance at a windmill on this issue.

So it’s too late for me, but not for you:

  • Sellers: if you are planning to sell your home you can at least be wise to what’s going on behind the scenes. Perhaps say you don’t want to pay more than 4% in commissions because you know it is likely that the buyer’s agent will give the buyer a credit.
  • Buyers: find an agent with both a good record of finding people the homes they want at a good price and who is willing to give you a substantial credit on their commission. Apparently 40 or 50 percent is not an unreasonable credit.

If this information is valuable to you, please send me 1.4% of the sale price. Thanks.

Retirement journal: Part 3

The Thinker by Rodin

It took about five and a half months of retirement but this morning when I woke up I realized had nothing pressing to do.

I guess that’s good. For much of these last months the pressing things were related to our pending relocation and mostly they involved fixing up our house. That work is mostly done. We got something of a Good Housekeeping Seal of Approval last week when our house stager came by to tour our house. It’s her job to make it attractive enough to draw a seller willing to pay top dollar. I was worried she’d want to bring in rented Ethan Allen furniture and make us move much of our furniture into storage, but there was none of that. She approved or at least could work with the furniture we have.

Her suggestions were for the most part easy to deal with: silver knobs and handles for the kitchen cabinets and lots of fluffy white towels for our bathrooms, which either she or our realtor will supply from their inventory. Our beds will need skirts around them. Perhaps the most onerous task is to get rid of the green trim in the living room, dining room and hallway. The green trim will become bright white, and that includes two doors painted green. Mostly she was positive. Our months of work have paid off. We’ll find out how well it worked around March 1, when our house will go on the market. If we get and accept an offer then a whole other process will start.

Already our home is becoming a house. Most of the personal items hanging from the wall have been put away. Possessions are moving into boxes that are getting stuffed into closets, probably not to be seen again until they are reopened in our new home. Furniture is getting moved around. Open space is what buyers want. So off went the valences that obscured the view of our deck, which makes our main floor now appear much larger than it is. Clutter like our coat tree is bad and we were instructed to hide it. Buyers must get the illusion of large and uncluttered open spaces, including kitchen countertops. Our many upgrades over the years are marketable. These include hardwood floors on the main level and granite countertops in the kitchen. The stager complemented us on our curb appeal and smiled when she saw our large backyard. It should appeal to someone or someones probably like us, just twenty or so years younger than us: someones with the time and money to tackle the endless tasks of keeping a house in good repair while actually living in it. I assume it would be a family with small children, but for some reason I imagine some gay or lesbian with lots of stuff buying the house instead.

Meanwhile our new home awaits construction. Nearly a month has passed since our last visit to Northampton Massachusetts where we will move but there has not been much progression on our attempt to get a house actually constructed. Both the builder and the architect inconveniently took two-week vacations during the holidays. The ground froze over while they went to warmer climates. The foundation is the first part of our house to go in. It doesn’t sound like frozen ground will keep us from having the foundation put in, but completion a P&S (purchase and sale) agreement has. We had to find a lawyer up there to represent us, and the owner of the plot is supposed to forward an agreement to our lawyer. It’s no big deal and it hasn’t happened yet, but maybe it doesn’t matter since we need to go up there again to have a meeting with the architect (now back in the snowbelt), and our amenities will certainly affect the price. In any event, we will need to find 5% of the assumed price when they start digging the basement, and any old check won’t do. It has to come from our credit union directly, because Massachusetts’s privacy laws prohibit the builder from seeing our account number.

There is a high probability that we will settle on the sale of our existing house long before the new house will be ready. This means we’ll have to live somewhere, so we’ll probably have to find temporary digs. We’ll likely move to some apartment or house near our new home, leaving much of our stuff in storage up there but unpacking quite a bit of it while we wait. The other possibility is that our house won’t sell for whatever reason. We will take all steps to prevent this of course, but it really has to sell if we are to pay for the bulk of the new house. Renting out the old house while buying the new is possible, but we’d need some sort of bridge loan. And it would raise the complexity of the whole relocation thing another notch.

All these things are in motion but at the moment not much of it requires our immediate attention. So today is something like a slack day, and it’s not the first. Last week we took in a Wednesday matinee. Apparently some theaters try to attract us people of leisure with discount Wednesdays tickets. That’s how we got to see The Imitation Game for $5.75 a ticket. It’s amazing how much less complicated living in Northern Virginia is when you can routinely get around outside of rush hour. It makes living around here almost pleasant.

I put out new versions of two open source programs that I have written. My consulting business continues to do well but at the moment there is not much in my work queue requiring immediate attention. When the weather cooperates I can get my daily walks in rather easily. I’m hitting the gym more often because most days are below freezing, but some days I take long walks in the cold air anyhow, bundled in my warmest coat, hat, scarf and gloves and with a podcast in my ears. I am contemplating starting a port of my two open source programs to a new platform, but finding the time to write my first app still is on the back burner, but something I want to do. It’s how I have fun, apparently. The idea is to sell an app or two, although most apps tend to languish, but hopefully it will generate some significant income worth the time invested.

In general, I am finding that retirement is good. I am still somewhat skeptical I can actually afford it, but a year or two of experience will prove it one way or the other. It’s not bad to bring in some income, but I do it mostly because I enjoy it, not because I have to do it. I want to stay busy and do stuff I enjoy but without feeling the pressure to make another mortgage or tuition payment. To find out if I succeed, keep reading these occasional retirement journal posts.