Your home is your castle, truer words have never been spoken. You may own a 1,000 square foot modest townhouse, but it is yours. It may not be fancy, but it provides shelter, memories and a place for family. Then why do people treat a home as if we were buying a coat, chair, couch or some other simple purchase? Why do people look for ways to save money, instead of ways to ensure they are getting the best representation to purchase their castle?

Buying a home is a very complicated process, the sales contract can run to 30 pages, or much more. The number of critical legal clauses and the fact that you have a deposit at risk suggest you make sure you have the best representation you can find. But often times a home buyer thinks they'll "save money" if they go directly to the agent listing the home for sale to negotiate directly with them, as opposed to having their own Realtor in the transaction. The thought is that maybe the listing agent will agree to reduce the commission since they are getting both sides of the commission, which will result in a lower price for the house. Maybe that will happen. But maybe it won't. And maybe it's not worth the money, even if it does. All I can do is cite anecdotal evidence, I have done no lengthy studies to refer you to. I can tell you:

1. After almost 25 years in the mortgage business, when I get a call from a home buyer who tells me they are buying directly from the listing agent without their own Realtor (or even worse are buying directly from the seller!) I cringe. I know that it's almost impossible for one Realtor to fairly represent a buyer, with no bias, when the seller is the one paying the commission. I cringe because I have done enough of these types of deals to see problems on almost all of them. Without proper representation for all sides bias occurs, and unrealistic requests get made without a professional buffer (i.e. a Realtor).

2. I had a potential client tell me recently that she contracted for a new home directly from a builder, who was willing to pay the fee for the Realtor that she brought to the transaction. But the buyer thought they'd save money if they negotiated without their own Realtor. The Realtor for the builder, in representing the builder, negotiated very favorable terms for the builder, and more importantly, wrote a large $65,000 deposit requirement into the contract, which represented the buyer's entire down payment. The buyer, not knowing that it is not standard to put up your entire down payment as a deposit, had no problem in doing this. Then the Realtor suggested the buyer use the builder's preferred mortgage lender (but did not mandate it). Unfortunately the buyer's credit report did not allow them to get a loan approval, and the builder's lender referral did not tell the client this quickly enough. All of the contract contingencies had expired, and the buyer being unable to get the loan approved, lost the entire $65,000 deposit. Had the buyer had their own Realtor representation, the contract would have never been written with such a large deposit, and the Realtor would have suggested that the buyer get pre-approved in advance, and to check several sources of lenders, one of which would have certainly uncovered the buyer was unable to get a loan, long before the contingencies expired. They came to me after this mess occurred, and I had no answers for them unfortunately, I was unable to get them any loan with the shape their credit was in, and they lost their deposit.

3. I had another buyer, this one was actually my client from the start, who also thought they'd get a lower purchase price without their own Realtor representation. The process was out of control from the start, the buyer did not feel represented by anyone which caused them to ask for unreasonable requests and attempt to renegotiate the contract as they went along (their own Realtor would have never allowed this), and the Realtor that was supposed to be representing the seller and the buyer (which is called dual agency) was put off by the buyer's demands and ended up (knowingly or not) backing away from the buyer's needs and focusing more on the seller. The transaction ended with the buyer withdrawing the offer, having nowhere to live after having already rented out their current home, and having a very bitter taste left about purchasing a home.

4. I know of several Realtor's who when approached by a buyer who wants to make an offer on one of their listings with no Realtor representation, immediately urges them to go out and find a Realtor to help them, as opposed to taking on the almost impossible task of dual agency. They know that dual agency is difficult, and that representing two parties when one party is paying the commission causes bias, and they refuse to take part in it.

I could go on with the anecdotes, there are numerous ones to cite from my almost 25 years in this business. But suffice it to say that its better to make sure you are fully represented and that your interests are being represented vigorously, as opposed to potentially saving a few percentage points on a very important transaction.

When buying a home the appraisal contingency addendum in a sales contract says the home buyer has a certain number of days (the date is negotiable) to get an appraisal that is equal to or greater than the sales price in the sales contract. If the appraisal is less than the sales price the buyer can still continue with the transaction, but they would have to pay the difference between the contract price and the lower appraisal in cash, or the buyer can propose that the seller agree to drop the contract price to the lower appraised value, or the buyer can declare the contract null and void.

But assuming the appraisal comes in at the agreed upon sales price, or higher, there still may be problems.

The underwriter may asked for a "desk review" of the appraisal, which may find cause for lowering the value. The underwriter may even ask for a second appraisal, which may come in below the value of the first appraisal. These types of appraisal "cross checks" are usually only asked for on higher loan-to-value loans, but the underwriter may ask for them for any reason. So there is obviously a cause for concern in some cases.

Another issue is that the turn around time of the appraisal is out of the control of the lender. There have been changes, the most important one is called the HVCC, that have caused turn times of appraisals to be uncertain.

There are answers to these problems. If the underwriter asks for a second appraisal this of course causes a question of whether to release the appraisal contingency based on only one appraisal when the second one may come in lower, and the loan may be rejected or altered. Usually if a buyer has proceeded in good faith, the seller will grant an extension to accommodate for the second appraisal, to allow for the extra time needed.

So if these problems occur it is not the end of the world. But buyers and sellers need to be aware of the potential for problems, should ask their lender a lot of questions up front as to the appraisal process, and should stay on top of the appraisal process the whole way.

Does anyone know how Realtors really get paid? I know people love to complain about Realtors and how they "get 6%" of the sales price, but that is not the whole story. It's barely any of the story. I love to beat up on any industry with grossly overpaid and inefficient workers as much as the next person, but only if it is merited.

First, each Realtor will only get their share of the total commission. If the total commission is 6%, then each Realtor gets 3%. But they really don't get 3% each. Each Realtor's employing broker will take their share first. Let's assume that our imaginary Realtors in this story are on an 80% split, that means they each get 2.4% after their employing brokers take 20%. We are already a long way from 6%…

And as for the listing agent we'd have to deduct expenses to further show an accurate picture of their earnings on each deal. Since it is part of a listing Realtor's job to advertise the home for sale, and those costs come out of the Realtor's pocket BEFORE ANY EARNED COMMISSION, we have to net those costs out as well.

Let's assume, and this varies, that the average Realtor spends about .5% to 1% of the sales price to advertise (this percentage may go way up on a smaller sales price, and it may go down on a larger sales price) the home for sale. So now the listing agent's net commission is down to:

3% gross
x 80% split
=2.4%
-.5% to 1% ad costs
=1.4% to 1.9%

On the sale of a $600,000 home, for example, $8,400 to $11,400 is a final net commission.

There are lots of variables to this story, so we could debate it endlessly. I know that a seller paying a 6% commission for a house that sells in a week with multiple bids sounds wrong, and some think the seller should pay less in this situation. But would a homeowner pay 9% for the house that sits on the market for 6-9 months and takes an enormous amount of marketing costs that comes out of the Realtor's pocket? Likely not.

So some Realtors get sales that are quick and easy, some get sales that take a long time and involve a lot of hours and cost, and some work with clients for numerous hours only to never get paid because the house never sells or the buyer buys through someone else! So when you average it all in, I don't know that Realtors are as overpaid as everyone thinks they are. As a matter of fact, the average Realtor makes a very modest living.

When I choose a Realtor I want to work with someone who makes a LOT of money, and I hope they profit greatly from their exchange with me. When you work with successful Realtors you get successful results. When you beat up on a Realtor for making too much money, or if you ask them to cut their commission, I am not sure you are doing yourself a favor. Buyer's agents are less likely to show a house that offers a reduced commission, and selling agents won't have as much inducement to spend as much money on marketing when they are getting paid a reduced commission.

Now, different models of selling and buying real estate (online Realtors, fee for service Realtors, For Sale By Owner, etc.), and different models of compensation for those different ways of buying and selling real estate, is a whole different discussion, and one I will blog about in the near future.

But for now, it seems 97% of all real estate is sold in the traditional way, with traditional Realtors, being paid traditional commissions, and trying to deviate from that may cause you to end up shooting yourself in the foot.

When you decide to sell your home you usually think you have a fairly good idea of what its worth, after all, you live in the neighborhood! Most of us schedule appointments with three local listing agents who we know, or we have been referred to, or maybe we have been getting their marketing material in the mail. Usually each Realtor will recommend a different sales price. Sometimes those prices are close together, but usually there is one or more Realtors who give you a much higher number, that excites you, and seems to agree with what you thought your place was worth. But, if this is the case, how is it that most homes seem to sit on the market for a long time, and end up getting the price dropped one or many times? Is it just due to a slow market? But even in a slow market won't just about anything sell if its priced right? The problem is most of us are convinced our house is worth more than all of our neighbors, for varied reasons.

So, which Realtor do you choose? If you're like many people, you pick the Realtor who gives you the highest price. This 'seems' to be a Realtor who is willing to listen to you you, and they care about putting the most money in your pocket. And if you need to drop the price later, you can easily do that later, right? Who cares? After all, everyone else does it. So go for the higher price!

The truth is that you may suffer from "Wishful Thinking Syndrome", and you may be dealing with a Realtor who (knowingly or not) engaged in "buying a listing." They "bought" the listing by suggesting you might be able to get a higher sales price than the other Realtors recommended. And the sad reality is that many times they are doubtful that your home will actually sell at the price they recommended. From the beginning they are thinking, "I'll eventually talk the seller into lowering the price when they see we are getting no offers".

So it seems the real estate market usually suffers from sellers who have a major case of "wishful thinking" combined with the fact that there always seems to be numerous Realtors who will accommodate these sorts of sellers.

During the first couple of weeks your home 'should' be a flurry of activity…..if the price is right. If your house is overpriced Realtors will not waste their time coming to preview it or showing it to a potential buyer. Their time is better spent previewing homes that are priced realistically that a client of theirs may actually write an offer on. When you drop your price later, your house is "old news." You will never be able to recapture that flurry of initial activity you would have had with a realistic price. Your house will now take much longer to sell.

Even if you do get amazingly lucky and sell at a high price, your buyer will need a mortgage. The mortgage lender requires an appraisal. If comparable sales for the last six months and current market conditions do not support your sales price, the house won't appraise. You deal falls apart. And when your house goes back on the market, potential buyers will think you might be getting desperate, so they will make lower offers. By overpricing your home in the beginning, you could actually end up settling for a lower price than you would have gotten at a more realistic initial price.

When you put a realistic price on your home, and it sells quickly, you will think, "we left some money on the table, we priced too low." Please trust me, you DID NOT. If your home is indeed worth more than you have priced it at, you will generate even more buzz, more potential buyers, and the price will be bid up to its natural and realistic level. And here is an example: if your home is worth $500,000 and you price it at $100,000; do you really think it will sell for $100,000? Don't you think the market will work its magic, and the price will get bid up to around $500,000? Of course it will. So why price the $500,000 home at $539,000, hoping for the best? Price it at $500,000; heck, price it at $479,000 and maybe you'll generate more buyers and it will sell for $505,000! But, if you price it at $479,000 and it sells for $479,000; then that is all it was worth. If you priced it at $479,000 thinking it was worth $500,000; but you wanted to generate buzz and multiple offers, guess what? If the buzz and multiple offers never came, and you only got one offer at $479,000; then that is all your home was worth at that time.

It is human nature for us to want the highest price for our home. But, think about yourself as a buyer, and how skeptically you look at the prices of other homes, and don't you wonder how the seller came up with their price. Think about yourself as a buyer and how excited you get when you finally find a house that has a realistic price!

No one over pays for anything anymore, no one. Trying the old, "let's just price it higher and see if there is at least one person out there who loves it as much as we did and will pay more for it," never works. Those people do not exist, not in this economy anyway.

There are many excellent Realtors in each marketplace, just because they may have news for you that you do not want to hear does not make them the wrong choice to sell your house. Treat selling your home as a business decision, delete wishful thinking from your process, and you'll find that you sell your home much faster than others and for a fair price.