By now you may have heard that things are changing in the Real Estate world with regards to commissions. In a landmark decision, the National Association of Realtors (NAR) has lost a lawsuit that stated that Real Estate Buyers should be able to negotiate commissions with their agent and or Seller. The lawsuit further states that Real Estate Buyers have the right to negotiate how their agent is paid and by whom. We will discuss some of the pros and cons of this landmark case and how it will affect buying and selling real estate in the future.
Currently, Real Estate commissions have been paid by the seller of a property and is negotiated upfront prior to their property hitting the open market. The traditional commission structure has been 5-6% of the sales price and if another Agent other than the agent who procured the listing called the buyer's agent generally splits that amount with the listing agent. For example, if you are selling a home with a 5% commission in the listing agreement when another Agent brings a buyer to the home the commission to that buyer’s Agent has already been negotiated with the seller and that has traditionally been half of the total amount and in this case, it would be 2.5% to the Buyer’s Agent and 2.5% to the Listing Agent. With the new ruling against the Real Estate industry, it now states that the buyer will have to pay for the commission when represented by an independent Agent. It still can be asked that the seller pay this amount but now the Buyer has to be notified that it is their responsibility to pay their Agent.
One should know Real Estate law states that any Agent in a Real Estate transaction must take the seller’s best interests into account during the Real Estate transaction. The exception is that if a Buyer contracts with an outside Agent to represent them their Agent can look after their best interests, not the seller's. This is done with a contract between the Agent and the Buyers they choose to represent them, this is called a Buyer Broker Agreement and from this day forward this form will become mandatory for all Agents that represent home buyers. Although this may seem like just another disclosure form in the already sea of forms a home buyer and seller must sign it and it has far-reaching consequences for the Buyer notwithstanding the cost of representation. A potential home buyer may be forced to come out of pocket to pay for representation similar to an attorney-client relationship with a contract upfront stating how they will be paid to represent them. If a potential home buyer chooses to use the listing Agent that buyer will not have the same representation as the Listing Agent has to look after the seller’s best interest before that of any potential home buyer. This type of representation in California is called Duel Agency where the listing Agent represents both the buyer and the seller. This is not legal in a lot of states so it will leave home buyers having to contract with another Agent.
The intent of the lawsuit other than the enrichment of attorneys was to allow potential home buyers to negotiate the commissions in the transaction. This ruling missed the mark for home buyers as now they may have to come out of pocket with money for representation where before the seller has paid the buyer’s Agent. In typical fashion, something that was spun to help home buyers will end up hurting them in the long run as it could dramatically raise the cost of buying a home. A potential Home Buyer could now end up paying more for a home to get their Agent paid so they don’t have to come out of pocket to pay them. If they go directly to the Agent who has the listing on the house and try to negotiate without an Agent representing them they too could pay more for the house without representation.
All is not lost however, here at MAE Capital Real Estate and Loan, we have a solution to the problem of buyer representation. We have been using this method to help our Home Buyers over the years and have been very successful and that is where we represent the home buyer and do the mortgage for them. Yes, our Agents are licensed for both Real Estate and Mortgage which allows our Agent to negotiate with a home Seller for a commission which we also give a portion back to the Home Buyer for their mortgage. In this scenario a home Buyer will not only get representation on their purchase, but they will get representation on the mortgage at the same time. This method has proved to be far more convenient for a Home Buyer as they only have to make one call to their Agent to get information on the home as well as the progress of their mortgage as opposed to having to make 2 calls one to their Agent and One their Loan Officer. Not only will this save them time it will also save them thousands in having to pay the new Buyer Broker it will save them on their costs of the mortgage and in some cases our Buyers get a lower interest rate as we have successfully negotiated all the fees to be paid by the Seller and we contribute some of the commission on the sale to the new loan. In some other cases we have helped our clients Sell a home and Buy another home and we do their mortgage for them, in this case, we negotiate a far lower commission for our Seller and when they buy our contribution saves them now on both brokerage fees as well as mortgage fees. If you are considering Selling and buying another home this way will save you thousands and thousands of dollars when you work with MAE Capital Real Estate and Loan. We call this service bundling which is similar to the way insurance companies work when you give them the opportunity to cover your house and cars. Bundling Services in Real Estate now makes more sense than ever. If you are looking for the best way save look no further than Mae Capital Real Estate and Loan.
Today’s topic might be a bit confusing to some, but rest assured if you know, you can make the right decisions with your money. We are all seeing a tightening of money lately due to inflation which is where prices of goods and services go up faster than income does. Inflation is the worst possible economic effect on any society as the people who are affected by inflation have less disposable income left over after they pay for housing, food, gas, and services. In America, there is a significant amount of people that live paycheck to paycheck meaning that they spend every dollar they make on housing, food, fuel, and services every month. When these prices go up and their income does not follow then people have to go to other sources to make those essential payments such as credit cards and this puts the average American in a deficit. Although this is not good for the average American it is also not good for the banking system as the banks rely on the deposits of Americans so they can lend out that money to keep the banks in an income stream.
This brings us to the banking system itself and most see the system as confusing and have no idea how banks actually work. In America and other Western countries, the banking system is what is called a Fractionalized Banking system. That is a big word that means that the banks can lend out most or all of the depositor’s money. For example, if a bank has $100,000 in deposits from 5 customers ($20,000 each) and it pays 3% interest to those customers the bank then can lend out a good portion of that money at higher interest rates. Remember that the banks have to keep cash on hand in case their customers need cash and in the past banks have held back about 10% of that money for cash. The other 90% is lent out at a higher rate than they are paying the customers that have savings in their bank. In our example, there is $100,000 from 5 people paying them a 3% return to keep their money in the bank. The bank can lend out $90,000 and only keep $10,000 for cash reserves and when they lend out the money they collect say 6% on the money they lend out. This process should leave the bank positive in income and has throughout the history of fractionalized banking.
Here is the problem with the system. Banks currently have no reserve requirements meaning that in my example the banks can legally lend out every dollar of your savings. This should not happen, and most banks will not lend out 100% of their customers’ deposits as they want to stay open in case there is a day when there is a heavy amount of withdrawal money. Banks are in charge of regulating themselves based on their lending models and most banks do a good job of regulating this. Here is the biggest problem facing the banking system today and that is inflation. As we talked about earlier when prices go up faster than incomes the bank’s customers are spending more than they make and they do this with credit cards and equity loans. There will come a point where the average American can no longer pay their debt due to inflation. Human nature is to make sure they have food on the table first and foremost. When the consumer can no longer pay their debt, they default. This means that if Americans can’t pay their credit cards they go into default and the bank receives no money. This holds for mortgages as well.
This is where things start to get crazy so hang on. Remember, that Banks will lend out around 90% of depositor’s money and if those loans start to go bad there is only 10% of cash left for banks to operate. So, a bank’s reserves may get eaten up quickly if there is a high default rate. Banks lend out money for Credit Cards, Residential Mortgages, and Commercial Real Estate loans and lend to other banks. When customers start to default on their loans the income stream to the bank is greatly diminished and they still have to pay interest on the deposits they have for their customers. If the bank has not held enough in reserves to account for this then the bank will fail. Or as we saw in 2008 when this started to occur the government stepped in to save the larger banks not through the use of the Federal Deposit Insurance Corporation (FDIC) but actually printing money to put back into the system. The smaller banks were bought up by the bigger banks. In 2008 we had other factors going on to bail out the system as we were not in an inflationary time it was more of a recession meaning the economy was retracting with no inflation. Real Estate values during this time went down the stock market sold back and there was high unemployment due to the recession. Interest rates went down during this recession as there was no real inflation so with lower interest rates those who had the means bought homes and commercial real estate as the cost of money was cheap and this brought the economy back.
Fast forward to 2020 when the COVID crisis hits. This was a forced recession by the government telling people they could not work. We had never seen anything like this in American history and the result was that the Government and the Banking system were faced with something they had never dealt with before. The mistakes that were made have led us to where we are today. The biggest mistake was to shut everything down that was not essential. The next mistake was that the government did not take into consideration where we were in the business cycle with a healthy economy at the time before they shut the economy down. The Government printed and sent out money to every American and it may have helped some in the short run the long run is what we are paying for today. The Government also lowered interest rates to stimulate the economy and it sure did with people buying houses and freeing up equity to buy more stuff. The money was flowing through the economy and people were buying things at a crazy rate until inflation hit people had to slow their buying habits and in addition to that the Federal Reserve saw the inflation and the only tool they had to slow inflation was to raise interest rates and they did.
Today all that stimulus money is gone, however, the government has continued to spend money by sending it overseas and starting foreign wars. I can guess that the reason for the wars is to get the economy moving again as war requires a lot of money to flow. We could go into the problems of this all day long, but this is not the forum for now. The problem is, currently with the high interest rates and high inflation the more the government spends the less the dollar is worth on the world stage. That coupled with the BRICS system that threatens to remove the Petrodollar on the world stage is further devaluing the dollar. The banks are starting to see their default rate climb with inflation and this is diminishing the bank’s liquidity as this continues to happen, we see a tightening of the availability of money. Today March 11, 2024, the Bank Term Funding Program (BTFP) which is a way for banks to secure funding from the Federal Reserve will be ending. This will force the banks to go to the discount window to borrow short-term funds. This will lead to money being tougher to borrow. We are also beginning to see defaults start to rise and that coupled with the already tight money supply for Americans high interest rates and rising inflation it is a wonder why this is being done. Is it being done so deliberately? You can’t help but think there is some master plan to change the monetary system in America or to create a global currency minus Russia China, Brazil, India, South America, and countries in the Middle East (the BRICS nations). But why?
I am beginning to think that all this stuff we have never seen before such as wide-open borders, money being sent to some foreign war nobody seems to want, money given to illegals, civil disruption, and propaganda being spread all over, is all part of a plan to make America weak. The reason is to change the monetary system and move to more globalization that not many Americans want. I see the UN helping in this destruction of America in that they are funding the illegal migration and to make it worse the US is the largest supporter of the UN. I mention this not to scare you but to open your eyes to the great sellout of America and a move to the International Monetary Fund or something else, instead of the Central Banking system we currently use and enjoy independently of the rest of the world. Before this can happen the Banking system in the US must collapse and it appears from someone who has watched and studied this for the last 45 years that this is what is happening. I don’t want to scare people and I might be stating the obvious, but things are changing fast. I am not holding out much hope for the Federal Reserve to lower interest rates any time soon as we still have inflation, and this is known not by the numbers the government feeds us but by simply going to the grocery store and filling up my car. The mortgage business is the slowest I have ever seen, even worse than 2008. This is also true for the Real Estate market and as things get tighter we should start to see more inventory hit the market as people are having a tough time paying their mortgages even if they have a 2 or 3% mortgage. I am also seeing more people defaulting on their mortgages creating a higher foreclosure rate. We as Americans can only do one thing to fix this crisis and that is to vote correctly, although I live in California and the system has been corrupt for decades it’s all we have to save our Constitutional Republic.
What is an assumable mortgage? It is a mortgage that another person can pay the difference in the current equity position and assume the underlying mortgage. In this piece, we discuss the advantages, disadvantages, the process, and how to get it done efficiently. This is not for everyone but if you are having to sell your home and you have one of those nice home loans with interest rates in the 3's or 2’s your home is more marketable than someone that may not have that available to them.
To define what happens when someone assumes your home loan you need to be armed with the right information. Realtors that have been in the business less than 10 years will probably have never had to deal with an assumable mortgage but those who understand how to market it for their sellers can end up getting the Seller more money on the sale of the house. An example of an assumable mortgage in a Real Estate transaction would look similar to this: Take someone who wants to sell their home and have an assumable FHA loan. They Owe $490,000 and the market is selling homes in that neighborhood for $550,000 to $600,000 and the potential seller has an assumable FHA loan with an interest rate of 3.5%. A potential home buyer will have to put down the difference in the sales price and the amount owed on the mortgage. Being able to offer an interest rate in the 3’s will make this home more marketable, but it is not for everyone as you need to be able to put the difference down in cash. So in this example, the house sells on the higher end of the market because of the 3.5% mortgage for $600,000 and the potential home buyer has to come up with $110,000 for a down payment the difference between the $600,000 agreed on sale price and the amount owed of $490,000.
Once a contract is negotiated between the new Home Buyer and the Seller the process begins. If you have a good Real Estate Agent, like an MAE Capital Agent, they would have done the leg work before the house went on the market to make sure the existing home loan is assumable and get the paperwork for when a potential home buyer does come knocking it will be ready for them. The process to get an assumption started is to complete the entire Residential Mortgage Application from the existing lender and provide them with all of your Income documentation, your banking info, and your credit report with a minimum credit score of 620, however, this may vary from lender to lender. You will be applying for the existing mortgage payment, balance, and remaining term. You will need to be able to show enough income to qualify for the existing mortgage by being able to prove that the mortgage payment and your existing monthly bills are no greater than 49.99% of your income. This is done by providing pay stubs tax returns and W2s.
Once you have gathered all the documents that the existing lender needs to issue an approval by analyzing all the documents provided such as pay stubs, bank statements, retirement statements, tax returns, W2s, and any other supporting documentation they require. If you are involved in an assumption transaction you should be prepared to wait as lenders are just getting the message that this is a viable way to sell a house, they have not fully ramped their assumption departments so it could take a bit, up to 30 days once they have the documentation. This is why you need a Real Estate professional on both ends that understands the process. At MAE Capital Real Estate and Loan, most of our Agents hold both a Real Estate license as well as an NMLS mortgage license so they can help talk the talk with lenders with trying to get an assumption accomplished. Knowing how the process works and being able to understand what the existing lender is saying is invaluable as this could save the transaction from falling through or taking longer than it should. Also when you bundle your services with MAE Capital Real Estate and Loan you will save money on the sale of your home and the purchase of your next home.
As a seller, you may not know if your loan is assumable without talking to your existing mortgage holder. If you know you have an FHA or VA loan you know those can be assumed. If you are a Veteran, you should know that if you allow your VA home loan to be assumed by a non-veteran you will not be able to use your VA benefit to buy a home again until that home loan has been paid in full. So, if you are a Veteran you may want to look at this more carefully especially if you are planning on using the VA home loan on your next home purchase. If this is a process that you are interested in please contact one of our Realtor/ Agents today as you will have a pro on your side.