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Working With a Real Estate Pro When Buying a Home

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working with a real estate agent, real estate tips, purchasing a home tips

house in handsSo, you’ve decided to buy a home—or at least to start looking for the deal of the century. With bargain home prices and mortgage rates at all-time lows, it’s certainly a great time to snap up something affordable. Unless you buy a FSBO, you’ll probably end up working with a real estate salesperson. FSBO means “for sale by owner” in the real estate world and is pronounced “fizz-bo”.

When you’re a buyer, working with a real estate pro gives you access to his or her expert knowledge—and the best part is that it’s usually free! A real estate pro will guide you through a sale at no charge because their commission typically comes from the seller’s pocket. They can give you invaluable information about homes for sale, comparable sales, neighborhoods, real estate contracts, negotiation, hassle-free selling tips, closing costs, loans, and so on. They can help you find something great and make sure that your deal gets to the closing table as quickly as possible.

What Is a Real Estate Salesperson?

Let’s start with some basics so you’re familiar with the players in the real estate industry and how they’re compensated. You’ll see and hear these words used to describe a real estate salesperson:

  • Realtor
  • Realtor-associate
  • Real estate associate
  • Real estate agent
  • Agent
  • Listing agent
  • Buyer’s agent

All these terms refer to someone who’s passed a series of education and tests such as a classroom course, a pre-licensing exam, and a state  real estate salesperson licensing exam. Agents must be proficient in a broad range of real estate topics including law, contracts, ethics, escrow accounting, agency rules, and advertising.

Salespeople who opt to become a member of the National Association of Realtors (NAR) are allowed to designate themselves as a Realtor®. A listing agent has an agreement to sell a property for a commission and they represent the seller’s interest. A salesperson who represents the interests of a buyer and is compensated by them, is known as a buyer’s agent. There are also transactional agents who work with both buyers and sellers but legally represent neither party. However, the vast majority of real estate professionals work with both buyers and sellers, but represent the seller because that’s who generally pays the commission.

What Is a Real Estate Broker?

Real estate salespeople have to work under the guidance of a broker and are usually a commissioned independent contractor. More about commission rates in a moment. Salespeople can’t put up their own shingle until they’ve been in the business for a certain period of time and pass their state’s real estate broker licensing exam. The broker of record can be the business owner or another person hired to manage the office, for instance. The broker contracts with clients, manages the office escrow fund, and pays a salesperson. They give salespeople certain benefits, such as office space to meet with clients, use of office equipment, an advertising allowance, and lots of coffee. Brokers might go by these various names:

  • Realtor (if they’re a member of NAR)
  • Broker-Realtor
  • Broker-owner
  • Broker-associate
  • Broker agent
  • Broker-salesperson
  • Real estate broker
  • Listing broker
  • Buyer’s broker

How are Real Estate Professionals Paid?

To demonstrate how real estate professionals get paid, I’ll take you through a typical example. Let’s say you’re selling a home and put a FSBO sign in the yard. You don’t get any bites. You realize that you don’t have time to market your home properly or to meet and greet potential buyers during the week. You decide to use the expert advice and services of a real estate pro.

You meet with an agent named Susie and sign a listing contract. A listing contract is an agreement between a seller and the broker office that outlines what they’re going to do to earn a commission. You agree to pay Susie’s office, Happy Go Lucky Realty a 6% commission if your home is sold before the contract’s expiration date. Susie is now your real estate agent and will handle all aspects of marketing your property.

A week later you get a call from Susie and she says that an agent named David from Get-Er-Done Realty would like to show your home to an interested party on Saturday. Lo and behold, on Saturday afternoon Susie calls to tell you that she received a purchase offer from David’s client. You meet with Susie, review the offer, and counter it at a slightly higher price. The buyer accepts your counter-offer for an even $300,000.

Since you agreed to pay a 6% commission, you’ll owe $18,000 ($300,000 x .06) if the deal closes. Here’s what happens with your commission money: It gets split 50-50 between the two broker offices. Happy Go Lucky Realty gets 50% or $9,000 and Get-Er-Done Realty gets 50% or $9,000. Now, each of the brokers at those offices must pay Susie and David a percentage of their office commission.

A typical salesperson might be on a 50-50 split with their broker. However, top-producing salespeople might have a more favorable split, such as 60-40. Assuming that’s the case for Susie, she’d receive 60% of $9,000 or $5,400. Her broker at Happy Go Lucky Realty would keep the remaining 40%, or $3,600. David is a new agent on a less generous 50-50 split with his broker. Therefore David takes a 50% commission of $4,500 and the Get-Er-Done Realty broker keeps the remaining $4,500.

How to Negotiate a Real Estate Purchase

Many people don’t realize that a real estate sales commission is negotiable. Even though the seller may have committed to pay 6%, brokers may agree to lower their cut—especially if that’s what it takes to rescuing a dying deal.

Here’s an example: You want to buy a home for $350,000, but not a penny more. Your real estate salesperson has a perfect house for you, but it’s listed for $375,000. You offer $350,000 and the seller counters at $355,000. If the seller has to pay a 6% commission, you may be able to  negotiate that it be lowered to 4.5%, saving the seller 1.5%, or $5,325. If the brokers agree to reduce their commission, it’s likely that the seller would pass the savings on to you. If they reduce the price by $5,325, it would meet your price criteria at $349,675 ($355,000 – $5,325).

I’m not suggesting that real estate pros aren’t worth their commission. I was in the business  early in my career, and can tell you that most agents work seven days a week and juggle a thousand tasks a day. But when given the choice, many agents would rather have a reduced commission, than no commission. It’s just one of many negotiating tricks that you can keep up your sleeve for getting the most real estate for your money. Another tip is to request that the seller pay your closing costs, so you can keep more of your cash in the bank.

(Photo by thinkpanama)

Weekly Recap: Tithing, Marketing and Hustling

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Hope everyone’s having a wonderful Sunday so far :)

Comparing Auto Insurance Quotes Online

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comparing auto insurance quotes, auto insurance advice, auto insurance comparison

(Guest post by 21st Century Insurance)

The internet has made comparing auto insurance quotes easier than ever, which is great news for customers looking to save money on something we all need to have, but hate to think about. There are a few simple things to keep in mind when comparing online though, to make sure that you’re comparing rates and policies fairly, and maximizing your potential savings.

One of the first things you should do before comparing online quotes is determining what coverage you want and need. All states require some kind of auto insurance coverage, but each state has very different rules for minimum coverage, and some of those state-required minimums would still leave you very exposed in case of an accident. Look at your current policy and do a little research online and figure out what you think the best coverage for you will be. Remember, you can always change the coverage options later in the process to fine tune your rates.

Once you’ve determined what coverage you want, there are a few more tasks before you can really get down to comparing car insurance online. To get an online quote, you’ll also need your car’s Vehicle Identification Number (often called simply the VIN) and the current mileage for any vehicles that you’re looking to insure. The VIN is usually found on a small plaque at the base of the windshield and mileage should be as accurate as possible. I always find it helpful to have my current policy in hand during the process for reference too.  With all of these things in hand, now you can quickly and easily compare auto insurance rates online.

There are two basic ways to compare car insurance online – through major insurer’s websites or via “shopping” sites, that aggregate results from around the web. There is no right or wrong way to go about the process, but sometimes the shopping comparison sites will provide rates for many smaller insurance companies that often have extremely competitive rates and, sometimes, superior customer service to the big players in the market. I personally prefer a mix of the two approaches, as sometimes the shopping sites won’t be able to get you that perfect coverage option that you might be able to customize on an insurer’s site, but they sometimes show you options that just didn’t know existed.

Either way you go, shopping for auto insurance online shouldn’t take more than an hour or two, and often leads to great discounts on your next car insurance policy.

What’s Coming Due to Healthcare Reform

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healthcare reform, healthcare options, healthcare improvements

In March of 2010 the Patient Protection and Affordable Care Act, also known as “healthcare reform,” became law. Many of the big changes—like requiring everyone to have health insurance, prohibiting discrimination based on pre-existing conditions, and putting caps on the amount of coverage you can get—won’t kick in until 2014.

However, many reforms to our healthcare system have already begun. Let’s take a look at what changes have occurred and what regulations will take effect by the end of 2010. By the way, many of these regulations won’t apply to your health plan until it’s renewed (or if you get a brand new plan) after September 23, 2010. For most people, that means they’ll see the changes begin after the New Year.

What Are the Healthcare Reforms?

The healthcare regulations that have already started are aimed at expanding general services to those with low-income, to retirees, and to those in rural or underserved areas. The government is spending money to reign in fraud, to keep health insurance premiums as low as possible, and to promote the benefits of taking better care of ourselves. Here’s a summary of these new provisions:

• Fighting fraud:  Health care providers will be subject to new screening procedures in an effort to weed out the massive fraud and waste that’s taking place in Medicare, Medicaid, and CHIP (Children’s Health Insurance Program).

• Examining rate hikes: States that set up a system to make insurance companies justify premium increases will be eligible for $250 million in grant money.

• Incentivizing health care workers: Uncle Sam wants more doctors, nurses, and physician assistants. They’ll be handing out scholarships and forgiving student loans tax-free for medical pros who work in underserved areas.

• Promoting good health: The Prevention and Public Health Fund gives the government $15 billion to spend on programs aimed at keeping Americans healthy.

• Expanding community health services: Funds are going toward the construction of new health centers and the expansion of services to patients.

• Expanding Medicaid coverage: States are getting money to cover more individuals and families under Medicaid who weren’t previously qualified for the program.

• Extending coverage for early retirees: Employers can participate in a $5 billion Early Retiree Reinsurance Program that covers retirees age 55 to 65 until they become eligible for Medicare.

• Covering those with pre-existing conditions: The Pre-Existing Condition Insurance Plan will cover those who have been uninsured for at least six months due to a pre-existing condition. (This is a temporary measure until 2014, when coverage can’t be denied due to pre-existing conditions.)

What Healthcare Reform Started September 23, 2010?

At the end of September, on the six-month anniversary of the healthcare reform law, the newest round of regulations took effect. These consumer protections will help insure children, young adults, and make emergency room visits more affordable. Preventive care, like mammograms, colonoscopies, and vaccines, must now be covered without any copayment or deductible.

More provisions of the healthcare law will continue to roll out from 2011 through 2014. But for now, these are the changes that you should be aware of:

• Covering children: Those under the age of 19 can’t be denied coverage due to a pre-existing condition.

• Covering young adults: Children can now stay on their parent’s health plan until they turn 26 years old, unless they have their own workplace insurance.

• Giving free preventive care: All new plans must cover certain services completely free of charge. Get a list of all the covered services at healthcare.gov.

• Covering emergency room visits: Insurers must pay for emergency room services you receive from a hospital outside of your plan’s network.

• Banning repeals in coverage: Insurance companies can’t rescind coverage due to a technical mistake on an application—they must prove fraud.

• Eliminating coverage caps: Essential benefits, like hospital stays, can’t be subject to a dollar limit for lifetime coverage. Annual limits for certain services are restricted.

• Establishing a review process: Consumers can appeal claims decisions made by their insurance company and have them reviewed externally.

Having health insurance is important not only for your physical well-being, but also for your financial health. Unexpected medical bills could devastate anyone’s personal finances. If you don’t have affordable health insurance through work, go to the Insurance Finder at healthcare.gov where it’s easy to compare plans and rates for private policies.

(Photo by kafkan)

The Differences Between a Traditional and Roth IRA

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traditional IRA, Roth IRA, retirement options

You may already know that IRA stands for Individual Retirement Arrangement (it was formerly called an Individual Retirement Account). It’s a special tax-advantaged investment vehicle that’s available to the vast majority of Americans. But do you know whether a traditional or a Roth IRA is best for you? I’ll explain the basic differences between the two types so you’ll know which one is more beneficial for your situation.

What Is a Traditional IRA?

With a traditional IRA you generally don’t pay taxes on the money that you put in the account. For example, if you earn $100, you can invest $100. You pay taxes on your income and earnings in the future, after you retire and begin to take qualified distributions from the account. You defer paying taxes on income and earnings until you withdraw money from a traditional IRA. So instead of getting taxed on the amount of money you put in the account, you get taxed on the amounts that you take out. That gives you an immediate tax break in the current year.

What Is a Roth IRA?

A Roth IRA, on the other hand, has the opposite taxation requirement. You have to pay tax upfront on the money that you invest in the account. When you take a qualified distribution from a Roth during retirement, you don’t owe a dime in taxes because you already paid taxes on the front end. All the earnings that have accumulated in the account for years or decades get a free ride from taxes, too. So, investments in a Roth IRA grow completely tax-free!

What are the Pros and Cons of a Roth IRA?

Without a doubt, tax-free growth is the best part about having a Roth IRA. But there are a few more advantages to a Roth:

  • You can fund it at any age. That’s different from a traditional IRA because you can’t make contributions to a traditional account after the age of 70½.
  • You never have to take a distribution. Whereas traditional IRA owners must begin taking distributions starting at age 70½.
  • You can easily pass money to your heirs. Since you’re allowed to contribute money at any age and never have to take a withdrawal, it’s a great vehicle for giving money to your beneficiaries.

However, having to pay taxes up front for Roth IRA contributions can be a disadvantage when compared to a traditional account, if it means that you don’t invest as much. Let me explain: Let’s say you earn $100 and want to contribute it to a Roth IRA. If your average tax rate is 25%, you’d have to pay $25 in taxes before making the contribution. That would only leave you with $75 to put in the Roth account. Investing with after-tax money could end up being less total money over the long run when compared to investing pre-tax money in a traditional IRA. However, that could be completely overshadowed by the tax-free advantage if your account has enough growth.

Another disadvantage to a Roth IRA is that you can’t exceed an annual income limit that’s set by the Internal Revenue Service (IRS). Here are the 2010 income limits:

  • For single taxpayers, Roth contributions are phased out or reduced if you have modified adjusted gross income (MAGI) between $105,000 and $120,000. When your MAGI is $120,000 or more you can’t make a Roth contribution.
  • For married taxpayers who file a joint return or for qualifying widow(er)s, Roth contributions are phased out if you have MAGI between $167,000 and $177,000. When your MAGI is $177,000 or more you can’t make a Roth contribution.

What is a Roth IRA Conversion?

If you make too much money to fund a Roth IRA, another way to open one is to convert funds in a traditional IRA to a Roth. And by the way, you can convert the entire amount in your account or just a small portion of it. When you do a Roth conversion you must pay taxes on any funds that weren’t already taxed. But get this: The IRS has put a special incentive in place to help you manage the tax liability for doing a conversion this year. If you make a Roth conversion by the end of 2010, you’re allowed to split the tax liability equally between the next two tax years—2011 and 2012.

However, be aware that even if you convert funds to a Roth IRA, the income limits for making contributions still apply. So if you make too much money (remember, that’s over $120,000 for single filers and over $177,000 for joint filers in 2010) you won’t be eligible to contribute new funds to your Roth nest egg. But that’s okay because the investment will grow tax-free for as many years as you keep it in the account.

Should You Have a Traditional or a Roth IRA?

Here are four questions to help you decide whether you should have a traditional or a Roth IRA:

1. Do you think U.S. income tax rates will be higher in the future, when you’ll need your IRA money? If so, paying a lower tax rate now for Roth contributions or for a  Roth conversion is better than paying a higher tax rate on traditional IRA withdrawals later on.

2. Do you think your income tax bracket will be higher when you retire than it is now? That’s usually the case for young workers who are just starting out. Again, paying less tax sooner for Roth contributions or for a conversion, rather than paying more tax later on when you withdraw from a traditional IRA, is better.

3. Can you pay the tax liability for converted funds from sources other than your IRA? If you convert a traditional IRA to a Roth in 2010, you don’t have to pay the taxes until the 2011 and 2012 tax years.

4. Did your traditional IRA take a beating in the last few years? If it hasn’t fully recovered, having a lower account value means you’ll pay less tax to convert it to a Roth than if the account value was higher. That’s a way to make lemonade out of financial lemons!

The traditional versus Roth IRA question is not a simple one. At dinkytown.com you’ll find helpful resources such as the Roth vs. Traditional IRA Calculator to help you understand which type of account is right for you. The Roth IRA Conversion Calculator will show you what advantage, if any, you’d get from doing a Roth conversion. Of course, everyone’s tax situation is different, so it’s a good idea to speak with an accountant or a financial adviser about whether doing a Roth conversion is best for you.

(Photo by thinkpanama)

Weekly Recap: MonaVie, Michael Arrington, and Being Broke

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Here’s to another great Saturday!  If you’re looking for some reading material, check out some of our favorite articles and carnivals from the week.  Enjoy!

I’m Engaged! The (Financial) Journey Ahead Of Us

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couples advice, financial journey of couples, couples talk

After three years of dating I decided it was the right time for to ask my girlfriend the question I have been waiting to ask for a long time: Will you marry me? And the answer, of course, was YES!

While we are definitely enjoying our new relationship status, inevitably we are looking towards the future and slowly but surely planning. If you know me, you know that I’m always trying to plan ahead and this is no different. I’ve already thought about some of the financial challenges we will face before I popped the question. We are prepared to tackle them together.

While some DINKs surely got engaged when they had been in the work force a few years, I’m sure there are an equal number who got engaged while they were in school and can probably relate to a lot of these challenges we will face (and overcome) in our marriage:

1) DEBT: Combined we have quite a bit of student debt. My fiance will go to grad school within the first couple years so her loans will be on hold for the time being. Either way we will eventually have to pay down this giant debt (though I think it was well worth the investment). We don’t really have any other debt at this point besides this, but there is a possibility around the time of the wedding next summer that we will be so low on cash that we have to go into a little debt just to get through that time in our lives (see #3).

2) Uncertainty: It’s a pretty difficult time to be graduating from college. I will be done in December and my fiance will finish in the Spring. Uncertainty about jobs, income, and the economy will be surrounding us. I think we will survive because we both are willing to work very hard to make ends meet. I used to be concerned about finding the “right” full time job, and there is a good chance I will get that job with the income and benefits I desire, but I am also ready to do what I have to do if that does not work out.

3) Wedding: The wedding won’t be cheap; there is a reason many claim that many people call the wedding industry “recession-proof.” We won’t be receiving significant (take that to mean what you want) help from either side of our family. While we will get some aid, we will need to save up whatever money we can so that we don’t have to take out too much debt to pay for the wedding. Preferably we would take out no debt but there is a good chance that won’t be realistic for us.

So we begin our (financial) journey together. I definitely credit my early exposure to finance blogs as a reason why I feel prepared to take on some of the challenges ahead of us. We hope you read some of our updates along the way and give us your advice!

Weekly Reading: Budgets, Blogging, & Couples

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Some posts we enjoyed this week.  Happy Saturday!

Some weekend reading for you :)

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Articles we liked this week:

Carnivals we participated in lately:

Savings Inception: Convince Your Spouse to Stop Spending

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(Guest post by Go Banking Rates)

It’s a well-known fact that money issues are often the root of marital distress. Finances can be a difficult subject in general, especially in today’s economy. So when a spouse spends with reckless abandon and shows no sign of slowing down, what can you do to put a stop to it and save your marriage?

For anyone who has seen Inception, establishing the notion that saving is important in your spouse’s mind could actually work quite well. However, until it’s actually possible to enter another person’s dream, rummage through his or her subconscious and plant an idea, here’s how you can use the principles of inception to trick your spouse into saving more money.

(Warning: You may want to see the movie first.)

The Concept Has to Be Simple

If there is a specific item or event you need your spouse to help save for, like a vacation or new car, you can’t come right out and say it. The concept must be simple to stick. It has to seem organic.

For instance, if you attempt to convince your spouse that he or she needs to save money for plane tickets so you can visit your family next Christmas, they can easily ignore this advice because it’s contrary to what they really believe. Your spouse thinks you will have enough money when the time comes. Your spouse thinks that right now, your DVD collection should be bigger.

Instead, plant a thought that is much broader and isn’t obviously from you. It should play on emotions as well, creating a sense of urgency. Something like, “I don’t want to be poor,” is vague, but powerful, and saving money is the action that would naturally emerge as a response to the thought.

They Must Believe the Idea is Their Own

Inception doesn’t work if the person thinks you gave him the idea. He must have his own “eureka” moment with a thought that seemingly resulted from his own line of reasoning. This is why, once again, a simple suggestion is not enough. You must trick your spouse into thinking he came up with a great idea all on his own.

How to Plant the Seed – A Dream Within a Dream

In order for inception to happen successfully, the idea must be planted deep down in the subconscious so the target never suspects it came from an external source. You must go down many levels and create “dreams within dreams.”

If you want the desire to save money to really sink into your spouse’s mind, you’re going to have to drop a lot of hints. Here are a few ways you can do it:

  • Leave the morning newspaper lying open on the kitchen table with the glaring story about rising foreclosure rates face up. Later that day, comment on how expensive your mortgage is.
  • Crank Phil Collins’ “Another Day in Paradise” on the car stereo when the two of you are out running errands.
  • When your husband or wife wants to go out on Saturday night, explain you have to stay home and clip coupons so you can have the brand name cereal for breakfast.
  • Leave a job board listing open on the family computer. When your spouse asks about it, explain you’re considering a second job “just in case.”

Potential Drawbacks of Using Inception

Remember that the fundamental problem with inception is that the planted idea becomes an obsession. It grows in the target’s mind until it takes over every thought.

You might wish for a financially savvy spouse and end up with a penny-pinching miser. Your husband or wife could develop an irrational fear of losing wealth and stop at nothing to protect every cent you earn. This is the risk you take.

If that sounds like too great a chance, you can always try to solve the problem by expressing your concerns in a calm matter and seek some sort of financial counseling.

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This guest post was written by Go Banking Rates, bringing you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide.

(Awesome photo by dierk schaefer)

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