Understanding the Real Estate Agent’s Commission for NELA Homebuyers

The agent compensation system in Northeast Los Angeles is designed to ensure smart, smooth transactions that are fair to both buyers and sellers.

The process of purchasing a home, particularly for first-time homebuyers, is somewhat opaque. You sign a contract with a broker, who you might view as your shopping friend, and yet you are not obligated to pay them for anything. At no point in the process do you cut a check to your real estate agent, even if they spend dozens of hours with you in the home purchasing process.

Let’s face it, it isn’t difficult for an agent to spend a dozen hours with a client. It can take a half a day to look at various homes for sale in Glendale, for instance. Logging another several hours looking at nearby homes in Glassell Park or Burbank makes sense.

This is no different in Northeast Los Angeles (NELA) as it is in Bel Air or San Francisco or Chicago or New York. In the American system of house buying, the actual compensation to both agents, those representing buyers and sellers, is somewhere between 5% and 8% of the sale price of the home. It is paid for by the seller and split 50-50 between the agents, typically (although that occasionally gets negotiated differently between them).

So, for example, if you buy a home in Eagle Rock for $650,000 the commission might be 6%. The seller then pays out $39,000 to the brokers, who then each get (give or take) $19,500 for their work. Nice, right? Keep in mind they might spend many hours in showing the home to a variety of buyers (weekdays, evenings and weekends), all while directing preparation of the home for sale, or showing a buyer 20 or 30 other properties after spending hours on research (in towns adjoining this one, such as Mt. Washington, Hermon, Glassell Park, Highland Park, Garvanza and others), negotiating prices, drawing up contracts and guiding buyers and sellers through the closing. Also, Realtors rent offices, employ administrative and marketing staff, and absorb the marketing expenses (photography, videography, signs, listings, even staging costs in some situations). Those brokers’ fees also may be split between agents who work for brokers. Brokers are well compensated, but not as much as is often mistakenly assumed.

The more successful agents know from their education and experience how to price a home fairly and effectively, how to work out issues in negotiations, and how to guide a buyer or seller through the paperwork, legal and financial/lender processes.

Also, sometimes a home doesn’t sell, a buyer doesn’t buy, and no one earns a commission. That’s the way it can work in real estate.

From time to time real estate agents try different methods of compensation. Alternatives to this system – each of which have clear disadvantages – could be:

• Pay a flat fee – Say you determine it’s worth paying an agent $5,000 to help you find or sell a $750,000 house. But the other party has to agree to something similar and it’s highly unlikely they would do that. In cases where someone is purchasing a home from a family member or friend this might be a workable plan. Or not.
• Pay a [lower] fee that offers no incentive to move quickly – This falls under the rule that “you get what you pay for.” If an agent is working to earn 1% on the sale price, will they be sufficiently incentivized to give a buyer or seller expeditious service? When the fee is at a market rate, the agents are collectively interested in making the sale happen as quickly as possible.
• Pay by the hour – If a buyer’s agent agrees to this, presumably the difference between the hourly fee and what would be the 3% (more or less) of the buyer’s agent would be value returned to the buyer. But that would incentivize an inefficient process, such as seeing too many homes that are inappropriate or, for the seller, bringing in too many prospects who aren’t really qualified buyers.

For more on homes available in NELA, speak with a realtor. Experienced NELA realtors are able to outline the terms of working with them under traditional fee structures.

Why be Pre-Approved for a Home Loan When Still Shopping for a House

It’s almost a requirement for Realtors and sellers to recognize you as a serious buyer by being pre-approved. But in fact, you really are just “pre-qualified.”

For most people the fun part of looking for your next home is seeing what different houses and neighborhoods look like. Homes for sale in Mt. Washington, for instance, look nothing like Echo Park homes. Streets in Highland Park don’t even remotely resemble neighborhoods in Atwater Village. Enjoyable as it is, however, it still take some effort.

But the real work – and what’s most financially impactful towards your goal of buying a home in Northeast Los Angeles – is getting the right financing. It helps to at least get pre-qualified for a loan before you make an offer, and better yet, before you even look.

• • Reasons for preapproval – If you are shopping for a home in Mt. Washington, Garvanza or Eagle Rock and you find something that is well priced, you know the competition can be high to get your offer accepted over other bidders. So it’s to your advantage for your agent to be able to say, “the buyer is preapproved.” If the seller is motivated (i.e., they are wary of waiting a few weeks to learn the highest bidder cannot qualify for a loan) they might actually go with a lower offer from a buyer who appears to be more solid.

• • What the doubters say – A pre-approval isn’t a certainty that you will get the mortgage, much less at a particular rate and favorable set of terms. The process of getting a pre-approval involves minimal documentation just to get you started, to know you are “in the ballpark.” It identifies a price range that is appropriate for your level of income and probably a credit check that would identify “red flag” issues. But because the documentation requirements for homes have gotten much more stringent in the past decade (post-2008 financial crisis), it will be necessary to provide previous years’ tax returns, and as to answer questions on sources of income (e.g., “What was the source of this $30,000 deposit last month?”).

• • How to do it – Long gone are the “no documentation” loans that existed prior to 2008. That’s probably a good thing, given how most homebuyers want to be able keep their homes, enjoy their time there, and accumulate value in the asset over the years to come. The documentation you will need are the following: Proof of income (W-2 statements, most-recent pay stubs, and proof of any other sources of income such as alimony, pay bonuses, royalties or residuals); verification of employment (with a phone call to your employer and possibly a most-recent past employer); proof of assets (investment account statements, savings of any kind, appraisals of property you might already own and, if you are receiving assistance on the down payment from a relative or friend, a letter stating it is a gift and not a loan).

Lenders will usually give the best interest rates to people with a credit score above 740 – that holds true whether you’re shopping in Hermon, Glassell Park or Highland Park as well as anywhere else in Northeast Los Angeles. But if you fall below that, it doesn’t mean you can’t get a loan. It just means you might have to settle for less-favorable terms.

Note that with self-employed individuals, the requirements for documentation of income are significantly higher. People who consider going out there on their own are highly advised to get a mortgage and buy a new home they think they’ll be able to afford before taking that step.

A NELA Realtor with experience in home transactions and the lending process can provide referrals on lenders and mortgage brokers – and show you homes you might find interesting.

Understanding Home Closing Costs in Southern California

Real estate closings involve multiple parties performing several tasks to ensure legal transfer of the property, plus a solid loan contract with your lender.

Looking to buy a house in Northeast Los Angeles – NELA, as it is known – but unclear of the process and amount of money needed? A licensed Realtor can help you figure it out. But for ballpark purposes, it might help to do some preliminary study on your own.

NELA is, after all, one of the hottest markets in all of Los Angeles. Not just the obvious neighborhoods like Glendale and Pasadena, but in smaller, lesser-known neighborhoods. Homes for sale in Garvanza are being bought fast. Real estate in Hermon is always in demand.

You might be in love with the schools in Mt. Washington, the housing inventory in Highland Park or the neighborhoods of Eagle Rock, but you have to work through some of these details before you can call any of those places home.

Much is made about closing costs in real estate transactions, and yet these vary for several reasons. The single largest expense, the real estate commission, is covered by the seller (who pays the commission in a split between the buyer’s and the seller’s agents).

Fees the buyer will need to pay at the closing come with some variation; the following are the largest of such costs at closing:

• • Homeowner association fees – If the property is a condominium the seller might be in arrears with the homeowners association, in which case you will find this out before entering the sales contract. In distressed circumstances (foreclosures, near-foreclosures and short sales), these fees might amount to thousands of dollars.

• • Private Mortgage Insurance (PMI) – If your down payment is less than 20% of the price of the property, you will be required to insure the mortgage at between 0.3% and 1.15% of the loan amount.

• • Origination fee to the lender – Even while you fix your dreams on a Victorian in Glassell Park, a two-unit duplex in Garvanza or fixer-upper in Hermon, you have to go through a large amount of paperwork with a would-be lender to prove your creditworthiness. And yes, they do charge fees at closing for all that fun.

• • Points – These enable you to change the terms of the loan to your favor if you pay one or more percentage points toward the mortgage amount. If you have the cash and plan to own the property for a decade or longer, paying a point or two upfront can save you much more over time.

• • Prorated property tax – As the LA tax year begins on July 1, you will need to cover whatever remains in the year in advance from the day of the closing.

• • Insurance premiums – Protecting the property (as required by all lenders) from damages and liability is required at closing also.

• • Escrow fees – Third parties performing escrow services need to be compensated for that work. Note that fee structures are not fixed or regulated by the state of California, but are generally set according to the size of the transaction.

Technically speaking there are multiple fees that will be part of the buyer’s closing costs but which the seller automatically pays for in a reimbursement. These include the city transfer tax, documentary transfer tax to title and the owners title policy. Multiple other fees under $500 (average) costs include the lender appraisal fee, credit report fee, prorated HOA fees, courier services related to the transaction, notary services, archiving fees, recording trust deed (to title), and loan tie-in fees.

Note that the process of looking at houses and negotiating a price, and perhaps that of qualifying for a loan, are typically more time consuming than the closing itself. An experienced realtor will be able to advise you on all these details, invariably to the point where you are told how much money to bring to the closing and in what form.