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What A Pre-Approval Letter Should Contain

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Meeting with a mortgage lender to get a pre-approval letter.

What should your buyer’s pre-approval letter contain? A letter from a lender should always accompany an offer from a potential buyer. How that pre-approval reads is important. It can be the difference between your transaction making it to the closing table, or not.

What Is A Pre-Approval Letter

What exactly is a “pre-approval” letter? It’s a letter from the bank or a mortgage lender that states the bank will lend a buyer the money to buy a house. The reason it’s pre is because the lender still needs to verify that the buyer is able to pay the money back over the life of the mortgage. That verification process happens in underwriting after the buyer is in contract.

The lender uses some upfront information to determine if the buyer is a risk worth taking. That information usually consists of but is not limited to;

  • A qualifying credit score.
  • How much money the borrower makes.
  • How much debt the borrower carries.

If all that checks out then the loan officer will issue a pre-approval letter. The buyer submits that letter along with an offer for your house.

Types Of Pre-Approval Letters

So you have an offer on your For Sale By Owner accompanied by a pre-approval letter. There’s something very important you need to know about that letter from the bank. There are two different kinds. Here we are going to discuss those 2 different types of letters and what you need to look out for.

Unverified Pre-Approval Letter

One way a lender may gather information on a potential borrower is to pull credit and ask a series of questions. Those questions are designed to establish the borrowers ability to be able to pay back the loan. Some loan officers may issue an approval based on those answers without verifying the information given.

That’s important! Sometimes that’s called a pre-qualification instead of an actual pre-approval. Not an actuall approval. In a case like that the lenders letter will read something like;

Financing is contingent on buyer submitting

  • Most recent paystubs.
  • Most recent bank statement, or two.
  • Last two years W-2’s
  • Most recent tax return

Here’s an example of a not so great pre-approval letter.

That means that the lender has taken the borrower at his word about income and after they are in contract verifies the information. The problem with that is if the buyer has given information the lender can’t use, overtime is a common on. Sometimes the the buyer simply isn’t truthful. When that happens your deal falls apart.

Verified Pre-Approval Letter

A verified pre-approval letter, and the type you want, is the opposite. The lender has done all the due diligence before issuing a letter. The lender verifies with documentation all of the buyers income and debt. In short he makes sure the buyers income and debt answers were accurate.

There will still be an underwriting process to further secure the buyers ability to repay the loan but that is mostly a formality.

Which Do You want?

With the income and debt verified upfront there is a much better chance of your transaction making it to the closing table. You want the pre-approval letter that the lender has taken the time to verify and document the buyers ability to successfully buy your house.

Make sure your buyers letter is not contingent on verification of income and debt.

Happy Selling!!

How A Realtor Gets Paid

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Handing over cash to a Realtor

So you’ve decided to sell your house. Generally, when people go to sell a house, the first thing that comes to mind is hiring a Realtor. Have you ever wondered how a Realtor gets paid? Who pays the Realtor and what they actually do for that paycheck? And how much does a Realtor actually make?

In this post I’m going to explain who pays the realtor, how a realtor gets paid and what they do for that money.

Mostly I write, and speak on my youtube channel, about For sale By Owners. The purpose is to give you tips and strategies to help you make more money and sell  your house fast. I teach how to sell your house yourself. In this post I’m going to do something a little different. I’m going to give you some information that will help you make decisions. Decisions like, do I want to sell my house myself or do I want to hire a real estate agent to do it and pay them?

So I’ll get right to the point.

It’s The Seller That Pays The Realtors

It’s actually the seller that pays for all the Realtors. The seller pays for both Realtors. That’s right. They pay for the agent that list his house. And they also pay for the buyer’s agent, the person who’s buying his house. So essentially the seller is paying for the person that’s going to sell their house for them and they’re also paying for the real estate agent that’s going to be negotiating against them.

Now, you might not think that makes a lot of sense, and you’d be right.  It really doesn’t. We’re going to go over how that came about and why it is the way that it is.

Look At It Like This.

Look at it like you’re going to court for some reason. Let’s say Somebody is suing you or you’re suing somebody for divorce, car accident, business deal gone wrong, whatever. When you go to court, you hire an attorney to represent you and your adversary, whether it be someone suing you, the state or whatever, they have their own attorney, an attorney that represents them.

Or maybe your involved in a business deal like a buyout or something. In that case, again, each side has it’s own attorneys representing them and their best interests.

And so you go to court, or you sit around a table, and you fight it out and the two parties with their separate representation come to an agreement or the judge after listening to both sides issues a judgment. It’s just like that in real estate only the seller pays for all of the representation.  The seller pays for all the Realtors.

How It Was

Now, it used to be back in the day before the Internet real estate was a lot different. Everybody worked for the seller and that was normal. One brokerage listed the house in the big books and another agent from another brokerage could find a buyer for the seller. That’s how it was thought of. Find a buyer for the house, not find a house for the buyer as we think of it today with the new “representation” model of real estate. It was all the agents job to get the house sold and get paid.

When a seller wanted market a house,  to list a house, you basically had to have a broker because instead of the Internet  the broker had these big, thick books and in those books they put all the houses that were for sale.

If you wanted to buy a house, you got a hold of a brokerage and you went and you sat down and you looked through those books looking for houses that you wanted to view. Then an agent would take you around and look at those houses until you picked one. The real estate industry held all the information. Agents could pick and choose what they wanted to show you.

It was in everybody’s best  interest to get that house sold for the seller. Nobody was really working for the buyer. Not directly. It was Normal for the person selling the House to pay the Realtor

How It Is

Nowadays with the internet it’s a lot different because buyers can go online, they can find out all the information that they need to be fully informed. Buyer’s can see all the homes that are for sale, they can find out when the home was last sold, find out how much the home is selling for and how much it sold for the last time it sold.  All that information that used to be held close by the real estate industry is now available to the public. Free of charge.

How It Works For Realtors Now

So the real estate industry did a big shift. Instead of just marketing and selling your house for you, they invented a different model and they call it representation. Now the seller and buyer both have representation. Exclusive representation in fact. Brokers and their agents will still market and sell your house for you but the marketing has become, oh, how can put it, easy. Really easy. So easy in fact a home seller can easily do it themselves so hence the change in an attempt to remain relevant.

Now the person selling the House, they have representation. The Realtor or brokerage that is listing their house for them. And the person that’s buying the House, they have representation. Both parties each haver their own Realtor that represent them but the seller pays for both.

They even use words like fiduciary. How that works is you actually sign an agreement that says that you’re an exclusive listing agency or you’re an exclusive buyer’s agency and you have a fiduciary duty to your client.

When you’re a buyer’s agent and you have a buyer, you negotiate for that buyer and you do everything you can to get a better deal for that buyer. You’re actually negotiating against that seller’s agent . And the seller is paying that buyers agent.

What Real Estate Agents Do For You

So let’s go over a little bit about what each agent does. What those Realtors do for their pay.

Listing Agent

You hire a listing agent to sell your house for you. They come over meet with you. It generally takes about 45 minutes to an hour. The listing  agent will  go around your house and they show you what you need to do to get your house ready for market. They might go over some staging tips with you. It’s possible the agent  might go over some cleaning tips with you, some ways to keep your house ready to show. They might suggest you take the pictures down off the wall. There’s a whole list of things that are helpful to do when you’re trying to sell your house to make a better presentation.

They’ll also help you price your house and they’ll do that by doing a comparative market analysis or a CMA, which means that they’ll pull comps from the area, houses that are similar to yours that have sold in the last six months. Then  they’ll use those comps to help you to come up with a price for your house.

Agents will take care of pictures and writing descriptions.

A listing agent will take care of all the transactional details for you. Once you get an offer,  they’ll take care of all the paperwork for you, which ironically, when you hire a real estate broker there’s a ton more paperwork a lot of which is to protect agents and brokerages. But they’ll take care of all that paperwork for you. There are contracts, state specific disclosures, sellers disclosures ect. ect, ect. .Just a lot of paperwork.

The agent will help you through the inspection process, the appraisal process and everything else associated with that real estate transaction all the way to the closing table.

And then they’ll go to closing and then the realtors get paid.

Buyers Agent

A buyer’s agent’s job is to help a buyer find a house. They have other duties to perform once they find that house but his main objective at first is to help that buyer find a house.

Once a house is found the agent will help the buyer to formulate an offer and negotiate a contract. Like a listing agent they will help the buyer with the appraisal and inspection process and all the transactional details and paperwork to get to the closing table.

According to the National Association of Realtors, 52 percent of buyers find their home themselves, the one they end up buying, on the Internet. According to that same source, 90 percent of buyers start their home search on the Internet. (Personally I think the number of buyers that find their house themselves is a lot higher. If I’m right and it is it doesn’t reflect well on the real estate industry. More and more tasks involved in a real estate transaction are being preformed by the buyer and seller making less need work for the agent.)

How A Realtor Stays Relevant

What that means is that most people don’t actually go out and look for a buyer’s agent to buy a house. They go directly to the Internet. Unless that buyer’s agent is referred by a family member or a friend most agents get hooked up with buyers through these Internet sites like Zillow and Trulia, realtor.com and and such.

A buyer will go directly to the Internet, to a site like Zillow to look at homes for sale. When they find homes they are interested in they click and can look at pictures, statistics, descriptions and find out everything they need to know about the house. If a potential home buyer wants even more “information” there is a button that can be clicked that puts you in contact with the “agent” This is where it’s gets tricky..

Most consumers think they’re contacting the listing agent, the person selling the house, but actually what you’re doing is you’re contacting an agent that pays to be on Zillow or such similar real estate portals. You put in your phone number and you click contact agent. One of these agents that the real estate site has sold your information to will contact you, not specifically to give you information, but to make you a client.

That agent will call you and then they’ll set up a showing for you and while they have you, they’ll try to get you to sign a buyer agency agreement. What that agreement does is it ties you to that agent. It says that if you buy a house, that agent is going to get paid one way or another. If the seller doesn’t pay them then you will have to. That’s a bad deal for FSBO’s or buyers looking at homes for sale by owner.

How The Seller Pays

When a home seller has a listing agreement with a brokerage the contract reads the seller has agreed to pay the broker. That fee is usually a percentage of the contract price and while it’s not legal to set fees it’s normally around 6%.  Then that listing brokerage is going to split that fee with the buyer’s brokerage. And that is how the seller ends up paying for both Realtors.

For Sale By Owner

But what happens if that buyer finds a for sale by owner? Then that buyers agent will call that for sale by owner, schedule a showing, talk to that owner and try to get them to pay the Realtor. Which that for sale by owner probably doesn’t want to do because that’s why they’re doing a for sale by owner.

You see how that works? Because now if the for sale by owner doesn’t want to pay the realtor, then the buyer is stuck with that whether they need that agent or not. And it ain’t cheap. Again, it’s the agency agreement that determines the buyer will pay if the seller doesn’t.

So that’s why real estate agents will sometimes shy away from for sale by owners and try and keep the buyers away too.

Avoiding Real Estate Commissions

The trick is to make sure that your house is dazzling, make sure it’s stunning so those buyers just cannot resist.  When you get them into your house, talk directly with the buyers. The agent will try to commandeer the conversation. Don’t let that happen.

Of course the best scenario is to get the buyer to call you directly bypassing any agent. You can do this up front in the description you write for the internet real estate sites like Zillow.com where you’ll market your home. Ask people to contact you directly for the best deal. If they have an agent and a signed agency you can raise the price to cover that expense if need be and there is no law that says you can not negotiate that agents commission. Find a way to make sure the buyer is included in all the negotiations. That the buyer knows all along the way what is happening. Often agents keep their buyers in the dark if it’s not favorable to them.

Protect Yourself As A FSBO

Pro tip: If you do raise the price to cover the agents commission write in the contract that the buyer agrees to make up the difference in cash between contract price and appraised value if any because of the Realtor pay. Make the buyer understand the price went up to pay their agent.

Finally

That is how the seller ends up paying for all the Realtor representation. It hardly seems fair but as my broker once told me, “if buyers had to pay for a real estate agent there would be no real estate agents.”

Go figure…

Joel

Should You Sell Your House Yourself?

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Handing over cash for house in front of beautiful new home.
Handing over cash for house in front of beautiful new home.

When it comes time to sell your house you may wonder should you sell your house yourself? By selling your house yourself you’ll save having to pay a listing agent and possibly no agent at all. That could be a lot of money.

Sounds like an easy answer, huh. Not so fast.

Opportunity Cost

There’s a thing in economics called opportunity cost. Opportunity cost is the potential loss or gain you get from choosing one alternative over another. By doing one activity you’re giving up doing something else that you could be doing. You’re giving up an opportunity.

Specifically, the most highly valued opportunity or alternative forfeited when a choice is made therefore every time you make a choice you incur an opportunity cost.

Economists use it to figure out what activity is the most profitable. So what does the concept of opportunity cost mean to a home seller? It can help you decide should you sell your house yourself?

The average home price in America is $260,000. The average real estate commission is six percent of that, which would be $15,600. That sounds like a lot of money and to most people it is. To others it might not be. It’s all relative and depends on what one’s time is actually worth.

How To Decide If You Should

Selling your house yourself and not having to pay a real estate agent saves you money. If you only make $75,000 a year, it may be more profitable for you to sell your house yourself. $75,000 a year works out to $6,250 a month before taxes. If you own an average priced house selling your house yourself would be like earning a little more than 2 months of work. That’s substantial.

 But say you make, like, three million dollars a year. That’s $250,000 a month. It might be more profitable for you to pay somebody to sell your house because you can use that time to make more money doing other things that are more profitable.

Of course, if you make 3 million dollars a year you may own a more expensive than average home but for comparison sake we’ll use that average number, $260,000. To get the point across.

What if you own your own business? And you make millions. Again, it would probably be more profitable for you to hire someone to sell your house for you because your time is worth more money than you would save.

When deciding if you should sell your house yourself you incur opportunity cost. Your giving up one thing to do another.

It all comes down to how much money you put in your pocket. For most of us average people? That’s selling your house yourself and saving thousands of dollars in real estate commissions.

Where Does A FSBO Get a Real Estate Purchase Contract

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happy young couple Counting the money saved by selling their house themsives.

The big question when selling your house yourself is where does a FSBO get a real estate purchase contract? Where do you get the paperwork?

Paperwork. A pain in the ass. Gets in the way of everything. But always necessary. If you could sell your house like you sell a car…on Craigslist, that would be nice. It’s actually almost that easy.

Real Estate Investment?

So I just got back from showing an investor a house and he asked me, would this be a good investment?

And I said, well, if you live there a while to build some equity and you sell it yourself, it could be a good investment.

He asks me,”sell it myself, what do you mean?” “What I mean is if you sell your house yourself, without hiring a real estate agent, it could be a good investment because you’ll keep your money instead of giving it away.”

Have you ever thought about selling a house yourself, I asked him?

And he told me, like most people do, I would not know the first thing about all the real estate purchase contract and paperwork.

Well, two things.

Paperwork & The Purchase Contract

First, there’s a lot more paperwork involved when you hire a real estate agent. Real estate agents need a lot of paperwork to cover their ass. Secondly, when you hire a real estate agent, that’s what eats deep into your profits. That makes the purchase a not so great investment.

The paperwork is not that big of a deal.

Filling out the paperwork is not that tough. When I sold my first house as a real estate agent, nobody trained me, nobody showed me what to do and there was no one there to teach me how to fill out the paperwork.

I got the contract, read it, filled in the blanks and I figured it out. Sold my first house just like that. Granted I had access to all the real estate purchase contracts and paperwork. I am a Realtor so that made it a little more convenient for me. Today all that is available to consumers online and easily accessible. The point is do not let the paperwork scare you. You can find real estate purchase contracts drawn up by attorneys that are amazingly simple to use. Like color by numbers. They’re sold all over the internet.  

Here’s a link here, for example, where you can buy a state specific real estate package including purchase contract and any required disclosures. There are others, just google it. Most title companies or escrow offices have some sort of contract you can use too. Personally, I would recommend spending a little money and getting a state specific real estate purchase contract with all the legalese taken care of.

FSBO

The rest of it leading up to a contract? Getting your house ready to sell, pricing your house correctly, marketing your for sale by owner and what to do once you find a buyer. I can show you all of it. You can sort through my blog posts or YouTube videos or you can get it all packaged up in order of steps.

Either way you and your family will be incredibly happy with all the money you’ll save by selling your house yourself.

How To Avoid FSBO Home Inspection Anxiety

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A vector illustration of home inspector in front of a house

Selling a home doesn’t have to be a bad experience. Most home purchase contracts make the sale contingent on two items, the appraisal and the dreaded home inspection. The appraisal shouldn’t be a problem, home inspections on the other hand can produce some anxiety. Find out how to avoid FSBO home inspection worries.

You’ve done all the hard work getting your house ready to put on the market, you’ve taken time to price it correctly and now it’s time to sell it. You’ve had several showings, a few offers, and you’ve chosen one
of those offers to work with. And now you have a contract. Your buyer does his inspections, as is his right, and he brings you a great, big, long list of things that he wants you to fix. 80% of the things on that list are small, inconsequential items that show up on every inspection report and should be expected.

In this post, we’re going to talk about the home inspection process, how it affects you as a For Sale By Owner and what you can do to protect yourself.

Home Inspection Contract Contingency

Most real estate contracts come with a home inspection contract contingency.. What that clause says is that once you’re in contract your buyer has a right to do any inspections that he wants to. These contracts are contingent on successful inspections. If they find problems with the house, they can ask you to fix those problems, but you’re not required too. You don’t have to. By the buyer asking you to do it, and you refusing, the buyer can back out of the contract and have earnest money returned. Sometimes a buyer will use the inspection period to try and renegotiate the contract. That’s what you want to avoid up front.

The home inspection is a important and necessary part of the home buying process. Problems arise when buyers misuse the process and use it to take advantage of a seller. Inspections were designed to find major problems in a house, not little piddly items that should be expected. {Some real estate agents and home buyers try and use the inspection process to renegotiate price.}

For example when a home inspection turns up a roof with hail damage. That’s a problem that needs to be addressed because you can’t buy a house with a bad roof. If the seller refuses to replace the roof that’s a good reason to want out of the deal. It could be foundation problems or a broken sewer or some safety issue like the presence of mold. You get the idea. Major problems.

What we’re going to concentrate on here is to learn to keep the buyer from asking you for a bunch of little things that really don’t matter and/or are insignificant. They can end up costing you money. So basically the inspection report and the repair process are another negotiation between you and the buyer. He wants you to fix things that cost you money and you don’t want to do it because it costs you money.

Protect Yourself and Save Money

There are several ways to protect yourself against radical repair requests during the home inspection that buyers can come up with. You also want to prevent any contract renegotiating fantasies.

As Is Where Is

One way, and especially in a market like this, which is a really intense seller’s market in Spring 2021, is you can simply put your house on the market as is where is. That’s probably not the best way but it is an option. I personally would never recommend one of my clients purchase an as is where is because they are left with absolutely no protection if there is a big problem. It makes buyers really leery about buying the house because if the house does have a bad roof the buyer is stuck with it.

Foreclosures are often as is where is.

Seller Will Do No Repairs

Another thing to do is to write into the contract seller will do no repairs or seller is not able to do repairs. That’s my favorite. This is letting your buyer know up front you’re not doing repairs but the buyer is still protected if there is a major problem. It leaves in a part of the contract that says that, if the buyer finds something
major wrong with the house and the seller won’t fix it he can back out of the contract and get his earnest money back. There’s also the finance contingency clause present in real estate contracts. If a house is so messed up it can’t get insured than a buyer can’t get financing. He can back out of the contract and get his earnest money back.

We have a clause in our contract in Kansas like that and most other states do as well. You have to check your individual contract and see exactly what it says.

So what you’re doing there is you’re preventing the buyer from asking you for a bunch of little insignificant repairs, but he still has an open to get out of the contract in case they do find a bad roof or a bad foundation or something
seriously wrong with the house that you’re not willing to fix. It’s a win win. The buyer can still use the inspection process for what it was intended and you don’t get cornered into spending a lot of extra money.

What You See Is What You Get

There’s another clause in our contract reads the buyer made an offer on this house
after looking it over and knowing of the defects of it or defects that he reasonably should have been able to know. That’s an important clause for one reason. If it’s an obvious noticeable defect a buyer shouldn’t be asking for a repair unless done upfront in the original offer at the risk of losing earnest money.

I use that clause for sellers often. When I get a ridiculous repair request, I’ll go through it and if there are items that were obvious and I feel they should have noticed in the original showing I’ll call it out. When my seller refuses to fix those obvious items I’ll send along that part of the contract highlighted to remind the buyer of what he signed.

Pre-Inspection

Adding value to a for sale by owner

Another thing you can do, which sellers rarely do, is a pre-inspection. A home pre-inspection prior to putting your house on the market is a great idea and can save you money. You simply hire a home inspection company to inspect your house. Once the inspection is complete the inspector will write you a report. Repair or fix anything major. By getting these repairs done before hand you have the control of how and who does them.

When you have an offer on your house give the potential buyer the inspection report. Any information about what has been repaired, if anything, the buyer now knows. The beauty of that is you have now disclosed all known defects. If you hire a decent inspector it should cover everything. The buyer doesn’t have the right to ask for any of those things to be repaired during the inspection period. You have no surprises.

Some of the common problems that come up
on these inspection reports:

  • Poor drainage around the foundation.
  • Loose toilet.
  • Gutters need cleaning.
  • GFCI needed in kitchen, bathroom, garage or exterior.
  • Doors drag on carpet.
  • Leaky plumbing.

These are just a few things that come up on inspection reports easily taken care of up front. Sometimes there are more serious problems:

  • Hail damaged roof.
  • Sewer problems.
  • Foundation issues.
  • Electrical fire hazards.

With more serious issues that come up you still have the opportunity to decide how to take care them rather than letting the buyer make that choice. That will save you money, sometimes substantially. You also eliminate the anxiety
associated with the inspection period.

I Do It

These are all effective ways of preventing unnecessary spending and anxiety around the inspections. I use the methods effectively when I’m selling a house for someone.

Which method you decide to use depends on what type of market your in. If it’s a sellers market like it is right now in 2021 you can simply say you’re not doing any repairs. Your house will sell, as long as it’s priced right and looks good.

If your in a buyers market where buyers rule then the pre inspection is a better idea.

Either way the repair process can end up costing you a lot of money, headaches and possibly a contract cancelation. This is how you avoid that.