Ron Rossi Real Estate Attorney at Rossi, Hammerslough, Reischl & Chuck
Ron Rossi Real Estate Attorney with Rossi, Hamerslough, Reischl & Chuck

Don’t cut corners in choosing agents

Arecent e-mail message I received illustrates a point made by one of my secretaries for years: “When you pay peanuts, you get   monkeys.”

The e-mail reads: “I found a buyer for my condominium in San Jose, and I asked an independent agent (he is a loan broker as well) to help us with this transaction. He agreed to do it for a limited fee, and he signed a dual agency agreement with both buyer and seller. He also brokered a loan to my buyer. Since I was going to move into a new home with an uncertain move-in date, I asked for a one-month rent-back

“That was OK with my buyer, and our agent wrote in the contract that the rent will be at the buyers PITI (principal, interest, taxes and insurance; he did not specify an association fee through which insurance is paid). My understanding of buyer’s PITI is that I have to cover his actual cost based on actual monthly statement plus monthly property taxes (prorated) and insurance (association fee). What happened is that the buyer took a complicated adjustable-rate loan with 4 different monthly options.”

What are the problems with this transaction, and why does the principle of “peanuts equals monkeys” apply? First, we are talking about a situation that is occurring with greater frequency. A buyer will go to a loan broker before going to a real estate agent in this hot real estate market in order to pre-qualify or to be pre-approved for a loan.

The loan broker, was also a real estate agent, will tell the buyer that he or she can handle the entire transaction and, in the case of the reader’s e-mail, he or she will act as a dual agent.

Actually, the loan broker may be a dual dual agent representing both buyer and seller as well as both borrower and lender! Dual agents often offer a reduction in their commission. What people fail to realize is that while many loan brokers are excellent in obtaining loans, most do not possess the necessary knowledge or skill to sell real estate, including knowledge of the transaction documents and market conditions.

I am a strong believer that you need qualified people at every step of the process. With the escalating median sales price, a buyer has to be careful to retain individuals who have expertise in each facet of the transaction. When I buy a home, I want someone who knows how to obtain the right loan for me and a broker who knows how to negotiate the right deal to help me buy a house if there are multiple offers.

Most often, these tasks are not handled by the same person. I saw a situation where a seller had multiple offers above list price. The seller was going to counter all but decidedly counter one presented by an agent who impressed the seller with his breadth and depth of the presentation. The seller chose the buyer’s agent who appeared knowledgeable and honest in order to simplify the sale.

The second problem faced by our scenario is the so-called “buyer to pay PITI”. Many agents who are not knowledgeable do not spell out what that acronym means. First of all, there should have been a buyer’s rent-back agreement that spelled out the rest. To simply state that the buyer should pay the PITI can leave a lot to the imagination.

In the language of real estate, PITI normally means principal, interest, taxes and insurance. The buyer would pay the sellers principal payment, interest component payment, pro-rata taxes and insurance for the rent-back period in which the seller owns the property and the buyer is paying rent. With the complicated loans we have these days, it is not sufficient to simply say “PITI” since everyone could argue later that they did not understand what PITI meant and perhaps perceived it to mean something else.

It is a well-known rule of life that you get what you pay for. The savings you think you save upfront are false savings that will be paid at some future time.

Remember the lesson about peanuts and monkeys.

San Jose Mercury News

Saturday, February 19, 2000

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