The US Real Estate Process - Where To Start
By: Justine Assal •
Buying property in the USA has always been popular with affluent investors from around the world. The reasons that people buy are often a mix of both lifestyle and investment goals but may lean more heavily to one side or another.
For instance some buyers are simply looking for a vacation or holiday home that they can come and enjoy, they may or may not rent it out when not occupying the property. Although they purchased the home for personal use, they will likely be banking on the capital appreciation of the property when they look to sell it. Others may be simply looking at income producing property to create a USD income stream and also a capital gain down the road. The types of property and location to purchase are directly related to these same factors including where the buyers enjoy spending time, a mountain lodge ski chalet, beach house, Miami penthouse, New York studio and Disney Villas are all extremely popular with international buyers.
With property types and locations as varied as the buyers themselves, it begs the question:
Where to begin?
This simply requires the buyer to assess his end goals and determine what they want the property for and from there, what markets satisfy those requirements. The next question is the budget and is it realistic for the area(s) of interest. Will financing be necessary and is it readily available for the property type and financial situation of the buyer. Many other questions will arise but early assessment of these two will generally guide the direction of the next set of questions.
When considering the purchase of residential property (not a commercial building) usually finding a Realtor or real estate agent is the next step and interviewing several to find someone with the local expertise and one that the buyer feels comfortable with. This is an important step and one that differs from real estate markets around the world. Real estate agents in the USA are licensed by the state in which they practice. A Realtor is a licensed real estate agent that belongs to the National Association of Realtors and subscribes to their code of Ethics. A Realtor therefore would be preferable to work with as they hold themselves to a high professional standard, pay dues to belong to the professional association and are required to continually educate themselves to the latest laws, market conditions and associate with other professionals that they can guide the buyer to.
Sometimes International buyers feel that they can get a property cheaper if they cut out the Realtor but this is rarely the case and more often, leads to a misguided purchase process that could easily cost the buyer dearly. The other misconception that foreign buyers often have is that usually in the US residential real estate process, the buyer does not pay for the real estate agent or Realtor’s services. This is customarily a seller cost and does not usually result in a lower sale price if the buyer went directly to the seller.
An illustration of the process would be that the seller will hire Realtor A to represent him and market his property in a commissioned agreement that varies in each market but for the purpose of this discussion we will use 6%. Realtor A belongs to the real estate association and has access to a computer system called MLS – Multi Listing Service. He adds the property to the online, shared database of local properties that all Realtors have access to with all of the property details. As part of the listing in MLS, Realtor A adds that there is a 6% commission of which he is sharing 3% to any other Realtor who might have a buyer for the home, this is regulated and strictly enforced to ensure that rules are followed.
Realtor A adds a computerized lockbox to the door that other Realtors can access and continues to market the property both to buyers and through other Realtors. Let’s say that a buyer comes directly to Realtor A and enquires about the property, puts a contract on it (no verbal offers are accepted usually so a contract is drawn up to present an offer), the Realtor A now represents both the seller (who wants the most he can get for his home) and the buyer who wants to pay the least. Realtor A is bound by the rules to simply facilitate the transaction and not share such information between the two parties.
Scenario 2 is that the prospective buyer has interviewed several prospective Realtors and has chosen Realtor B who is now working for only his interests and searching for properties that match his criteria, budget and wish list. Realtor B finds the home that Realtor A has listed and the buyer decides it’s a match. Realtor B represents the buyer’s interests only in this transaction and researches the property, the comparable sales recently in the area, draws up a contract offer and represents the buyer’s negotiation with Realtor A (who represents and reports to the seller). Realtor B and the buyer negotiates the best deal possible and then Realtor B manages the process from this point to the closing of the property, all the while only representing the interest of the buyer, this includes the arrangement of other services such mortgage advice, building inspections, and contractual compliance. The sale closes with a title company and/or attorney and Realtor A & B are both paid 3% of the property price in commission by the seller from the proceeds. If this sounds like a lot of commission, consider that a Realtor must work for a brokerage and is overseen by a real estate broker (a higher level license) who also takes a split. All of the marketing and fees to list the property are borne by the agents and brokers who work for commission only so the overall commission is cut into several pieces.
A good Realtor therefore is the eyes and ears of the international buyer and may result in a long term friendship and confidant, especially for a foreign buyer who is not present all of the time. Advice to prospective buyers therefore is do not try to cut costs by going around without a trusted Realtor, pick one and stick closely to them, don’t begrudge them the commission as a good Realtor is worth his weight 100 times over to guide the buyer about which property, how much to pay and to manage each detail of the process through the closing. Sometimes having local background expertise to know what not to buy that saves the investment!
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