Jay’s Note: “Real Estate 101” is a new series where we’ll explore the basics of real estate buying, selling and investing. Definitions, explanations and of course opinions. If you’ve been here long, you already know many of my series fail miserably. This one should stick though as the material is endless. And it’s not just for those who don’t know a lot about the real estate process, there should be information aplenty for just about everyone. It would be silly to commit to a rigorous posting schedule, as that would just be setting myself up for failure. I betcha we’ll get 2 ”“ 4 articles a month though. I’ll also go back through the archives as well as other industry blogs and spotlight some oldie but goodie articles on the Real Estate 101 page (accessible through the main navigation bar under the header).

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Here’s a rough transcript of a call I got last night. Similar conversations happen multiple times a week. . .

Caller: I’m calling about your listing. . .

(95% of the time, it’s not our listing. Our sites show ALL homes for sale in the Phoenix area)

Me: That isn’t our listing, but I’d be happy to give you some information on it.

Caller: I’d rather speak to the listing agent.

Me: Mind if I ask you why? They represent the seller, and the seller’s interests. . .

Caller: I understand how real estate works. The listing agent won’t make as much money if you sell the home. They will discount their commission if I work through them.

Me: Maybe, maybe not. But you’ll have no negotiation position. It’s quite likely we could get the home for a lower price ”“ saving you more than the thousand or so they might take off their commission.

Caller: That’s OK, I know how real estate works. YOU get more if I pay more.

So here is a guy that is convinced he can save money if he uses an agent that represents the other party in the transaction. The same agent who already has a fiduciary duty to the seller. If you are buying a home, don’t you want someone working with you and representing your interests?

Sure, dual agency is legal in Arizona (and many other places). Here you’ll need to sign a document saying you are OK with having limited representation. Read that again ”“ if you are a buyer and you insist on working with the seller’s agent, you have to agree to limited representation.

Is limited representation worth “saving” a couple of thousand (at best) on a purchase of the size, complexity and cost of a real estate transaction?

Let’s take our caller for example. He was calling on a $190K home. So let’s say for the benefit of argument that the listing agent says, “Sure, I’ll drop my commission by 1% of the sales price”. I assure you he’s thinking on a full price offer (after all, he’s already working for the seller to get them top price). So that means the caller can now (maybe) purchase the home for $188,100 in theory “saving” the buyer $1,900.

Let’s do a little math:

Buyer is putting down 20%, and can get a 5.5% fixed interest rate 30 year mortgage.

With a purchase price of 190,000, the buyer needs $38,000 down, so he’s financing $152,000.

That would be a monthly payment of $1,021.

With a purchase price of $188,100, the buyer needs $37,620 down so he’s financing $150,480.

That would be a monthly payment of $1,011.

So what, exactly, is the buyer “saving”?

OK, they need to show up with $380 less of a down payment. And his monthly payment will drop by a whopping $10 a month.

(yes, over the 30 year life of the loan, that $10/month amounts to $3,600. Assuming of course, you really live in the home for 30 years.)

Worth it?

What if, with his own representation he was able to negotiate a purchase price of 5% under list (which is entirely possible in the Phoenix market, and many others).

190,000 ”“ 5% = $180,500 purchase price. $36,100 down. $970 month. That’s $1,520 less down and a $41/month lower payment.

What if, with his own representation, he was able to get some seller concessions toward closing costs AND a lower sales price?

What if, with his own representation, he was able to get the seller to “buy down” his mortgage, resulting in a significantly lower payment across the term of the loan?

Do you really think an agent who represents the seller’s best interest is going to attempt to do this for you the buyer? Remember, you get limited representation. . .

Here’s a thought. Say you are interested in an REO property. During your inspection you find the home needs a new roof (water heater, A/C ”“ insert expensive item here). Do you think the seller’s agent is going to go to bat for you? Think he’s going to risk pissing off the lender (his client) and possibly lose future listings from that lender? No, he’s going to say, “Sorry, REO’s are always sold as-is”. (Hint ”“ sometimes a good buyer’s agent can get a bank to make major repairs, even if the home is listed as is).

Representation is important. We’re not talking about walking into Best Buy and purchasing a television. If that doesn’t work out, you can return it. And you’re not spending 200 thousand on a TV. We’re talking about a home purchase, quite likely the single largest purchase you’ll make in your lifetime.

Don’t you want someone representing you and only you and your best interests?