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Overview of the Players & The Homebuying Process


My main objective in writing Brincefield’s Guide was to try to condense, in readable, non-lawyer language, the advice that I would give to a member of my own family who was contemplating the purchase of a home. This advice is the product of more than 25 years of experience in real estate construction, financing, marketing and law.

The real estate business has been very good to me and my family and I firmly believe that the wise purchase of a good home can be one of the greatest sources of satisfaction anyone can enjoy. But, I also know first hand the terrible financial and emotional hardships some people have suffered from mistakes that they have made in the homebuying process. Almost all of the problems that I have seen have been ones which could have been avoided if the homebuyers had been better informed about basic “do’s and don’ts” (mostly “don’ts”) of the homebuying process before they signed their purchase contracts. And that is what this booklet is all about.

Because the primary focus of this booklet is on the Big Mistakes that purchasers should avoid when buying a home, I suspect that some will criticize it as being too “negative.” There are two responses to that: first, by definition, when you choose to talk about “Big Mistakes”, the discussion tends to focus on the things that people should not do when they buy a home. Secondly, if I really thought that people should just not buy a home, this could have been a much shorter booklet.

Big Mistake #1: Failing to Realize the Complexity of the Homebuying Process and the Need for Good, Independent Lega Advice

The homebuying process is very complex and usually involves selecting and coordinating the services of professionals in at least a half dozen different fields (see the Diagram on page 75) including real estate law, finance, brokerage, construction, surveying and insurance (especially title insurance). The process is full of hidden risks in each of these areas and it is very easy to make a Big Mistake without realizing it until it is too late to do anything about it.

Purchasers frequently make the mistake of relying upon the advice of people who are not qualified to give that advice or whose own self-interest may actually be in conflict with the best interests of the purchaser. (For example, unless you hire a real estate agent to represent you and only you, a real estate agent is required by law to represent the interests of the seller. (See Big Mistake #3.) Buying a home is probably the largest financial commitment that you will ever make. It will affect your financial condition and the quality of your life – and that of your family – for years to come. The cost of obtaining proper representation in the purchase of your home will, almost always, be modest in comparison with the potentially enormous cost of a Big Mistake in the homebuying process.

In more than 25 years of practicing real estate law, I have seen just about all of the major mistakes that homebuyers can make. I have seen many of these mistakes made over and over again. (I have even seen some clients make the same mistake more than once.) Thus, time and again, I have seen the tremendous financial and emotional hardships that have resulted from mistakes that could (and probably would) have been prevented if the home buyers had just had proper legal representation before they made the mistake.

Although it must appear to be self-serving for a real estate lawyer to say that you need the services of a real estate lawyer when you buy a home, I can only say that many years of experience have repeatedly justified that advice. I really believe that this one bit of advice is the best and most valuable single piece of advice in this entire booklet.

No one else in the homebuying process has the comprehensive training and experience necessary for the protection of your interests. No one else in the process has the true independence and lack of conflicts that are required to protect your interests.

Your attorney can help you negotiate a purchase contract that will protect your interests instead of compromising them. And even if you do not have the benefit of an experienced real estate attorney’s advice when you sign your purchase agreement, you can get your own attorney for settlement so that, at least at that point, you will have the benefit of competent, independent advice that will protect your interests. Good, independent legal advice at the contract stage and at the time of settlement can save you many times the cost of the representation.

In the final analysis, deciding whether or not to hire an experienced real estate attorney to represent you in the purchase of a home is very similar to the decision that you make when you decide whether or not to buy insurance to protect against any other type of loss. Most home purchases go fairly smoothly. The percentage of transactions that result in disaster for the home buyer is fairly small. However, the financial benefits that you can gain from being properly represented almost always exceed the cost of representation. Of course, what will happen in your specific transaction is impossible to predict but, when you come right down to the bottom line, why take the chance? It has always seemed to me that in transactions of such size and consequence, and in light of the potential for a financial disaster that might follow from a major blunder, the peace of mind that you buy with the services of an experienced real estate attorney is well worth the modest cost.

Big Mistake #2: Failing to Understand the Role(s), Duties, Loyalities and Conflicts of Real Estate Agents.

“Agent” vs. “Broker”. First, let’s get a few definitions out of the way. There is a significant difference between real estate agents and real estate brokers. Both agents and brokers must obtain real estate licenses from the states in which they work in order to be allowed to sell real estate. However, the educational and testing requirements for agents are less demanding than those for brokers.

Also, every real estate brokerage firm must have at least one principal broker. It may have more than one broker and usually has several agents, sometimes hundreds of agents. Individual agents are allowed to sell real estate only under the supervision of a real estate broker. Depending upon the practice in the individual firm, the supervisory role of the broker over her agents may be substantial or may exist only in theory.

“REALTOR®”. Many people frequently misuse the term “REALTOR®” to mean a real estate agent or broker. Although most REALTORS® are, in fact, real estate agents or brokers, not all agents and brokers are REALTORS® and not all REALTORS® are agents or brokers. A REALTOR® is simply a member of a trade association of people who call themselves “REALTORS®.” This trade association has chapters at most local levels as well as at the state and national levels. The National Association of REALTORS® has its headquarters in Washington, D.C.

The local, state and national associations of REALTORS® are open to all licensed real estate agents and brokers who are willing to pay the dues and subscribe to the REALTOR® Code of Ethics. In addition, other individuals and firms are allowed to join the various associations of REALTORS® as affiliate members. These affiliate members include, among others, real estate attorneys, auctioneers, surveyors, appraisers, pest inspectors, settlement service providers, mortgage brokers and lenders and other similar types of individuals who frequently do business with or receive referrals from REALTORS®.

Real estate agents and brokers are licensed and regulated by a state board or authority. Activities of REALTORS® are also regulated by the Professional Standards and Grievance and Ethics Committees of the various REALTOR® associations.

The state regulatory body that licenses and supervises real estate agents and brokers is totally separate from the local, state and national associations of REALTORS®. Among other things, the state licensing and regulatory body has a totally separate procedure for investigating and dealing with complaints against real estate agents and brokers. If found guilty of violating the regulations of the licensing board, an agent or broker can lose his license. No matter how grievous a violation of the REALTOR® Code of Ethics (so long as it does not also violate a licensing regulation), the worst that can happen to a violator is expulsion from the REALTOR® associations (which does not affect the agent or broker’s license to sell real estate).

As a general rule, the REALTOR® Code of Ethics provides standards to which all real estate agents and brokers should aspire. The better agents and brokers tend to be members of the various associations of REALTORS®.

For purposes of this Guide, the term “real estate agent” will be used to include both agents and brokers unless the context requires making a distinction between them. The term “REALTOR®” will not be used except to identify a member of the local, state or national association of REALTORS®.

“Listing” vs. “Selling” Agents. A couple of other terms that you need to understand are “selling” agent and “listing” agent. The listing agent is the agent who obtains the listing of the house for sale. Almost all homebuyers understand that the listing agent represents the seller.

Sometimes a home purchaser does not have a real estate agent and contacts a listing agent directly concerning a house which that agent has listed for sale. With respect to that house, the listing agent may also be the selling agent or it might be said that, in that particular transaction, there is no selling agent.

If the listing agent contacted directly by the potential purchaser impresses the purchaser, the purchaser may ask the agent to show her other homes for sale. In that case, the listing agent would then become a selling agent with respect to that purchaser and those other homes.

Sometimes a purchaser will not have any particular house in mind but will contact a real estate brokerage firm for help in finding a home. In that case, the agent who receives the contact from the homebuyer will become the selling agent for that purchaser and will begin to assist the purchaser in finding a suitable home.

In any event, however the relationship begins, the selling agent is the agent who initially helps the homebuyer determine things like the maximum price of the home that the purchaser can afford and the general type of home and neighborhood that appeal to the purchaser. Typically, the selling agent then begins to go around with the purchaser looking at the various homes for sale that meet the purchaser’s criteria. In light of all the time a selling agent normally spends with a purchaser driving him around, showing various homes, making helpful suggestions about financing, qualifying for a loan, etc., it is no wonder that many purchasers have the impression that the selling agent is the purchaser’s agent and that the selling agent will “represent” the best interests of the purchaser when the time comes to negotiate for a home. Not so. The selling agent is just as much the agent of the seller as the listing agent is. By law, both the selling agent and the listing agent owe their primary duty of loyalty to the seller, not the buyer.

As a matter of law, the legal duties and obligations of both the listing agent and the selling agent to the purchaser are very limited. Basically, although there are some exceptions, the only duty that both the listing and the selling agent have to the purchaser is not to make misrepresentations of material facts to the purchaser. When the time comes to get down to the real nitty gritty of negotiating the deal, including the price, terms of sale, allocation of financing and settlement costs, etc., neither the selling agent nor the listing agent can do anything that would adversely affect the interests of the seller of the home.

For example, both the selling agent and the listing agent are absolutely prohibited from suggesting to a buyer that the seller might accept less than the price at which the house is listed. Neither agent can negotiate any contract terms on behalf of the purchaser against the seller.

Purchasers who do not understand the existence and consequences of these legal obligations of the listing and selling agents to the seller will almost certainly give up, unwittingly, significant legal protections that they are entitled to in the homebuying process. In addition, because they have no one representing their interests in the transaction, they are also very likely to pay substantially more than they need to pay, both for the home and for the related services that they will purchase between execution of the contract and settlement of the sale.

Buyer Brokerage. The one exception to the rule that both the listing and the selling agents are the agents of the seller is the situation where the purchaser hires her own “buyer broker.” Buyer brokerage has become increasingly popular over the last few years, primarily as a result of the growing awareness of purchasers that both listing and selling agents represent the seller.

(Incidentally, the term “buyer broker” is the term that the real estate industry has more or less adopted to identify the situation in which a buyer is truly represented by a licensed real estate salesperson, regardless of whether that salesperson is an agent or a broker. Since that is the term that is used most frequently by people in the business, we will use it the same way herein.)

If you hire a buyer broker to assist you in the purchase of a home, you should have a written agreement between you and the buyer broker. You should read that agreement carefully to see exactly what it says about the buyer broker’s duties to you. In many instances, buyer broker agreements do not really obligate the buyer broker to represent your interests exclusively but merely obligate the buyer broker to treat buyer and seller “equally.” Such an agreement is not really a “buyer broker” agreement. In fact, it is nothing more or less than an attempt by the real estate agent (and the brokerage firm to which he belongs) to create a disclosed dual agency situation in which they can act as both a listing agent and a selling agent in the same transaction (and thus claim their full share of the commission on any sale) but not really “represent” the interests of either the buyer or the seller.

If a buyer broker cannot really advocate a buyer’s interests, what’s the point of buyer brokerage? By the same token, if the seller hires a real estate agent to represent the seller’s interests, exclusively, even when they conflict with the interests of a potential buyer, what’s the point of hiring a real estate agent, broker or firm that won’t do that?

The recent and rapid development of the buyer broker concept has already caused some dramatic changes in the way real estate agents, brokers and their firms do business. It has also given rise to some serious re-evaluations of the traditional roles played by real estate agents in the homebuying and selling process. To the extent that this movement has refocused attention on the ethical duties of real estate agents to buyers and sellers and the potential conflicts that can arise when one agent tries to serve two masters, the attention can only be helpful to everyone involved.

It is clear that the rapid development of buyer brokerage has put many large (and some small) real estate brokerage firms in a quandary. On the one hand, they do not want to lose this new business opportunity to represent buyers in home purchase transactions. However, they also do not want to lose their traditionally large market share of listings. Ideally, they would like to have both sides of any given transaction so that the entire commission stays in-house. This may be fine for the brokerage firm but it is anything but fine for the home purchaser and seller.

The traditional method of residential brokerage has not provided adequate representation for buyers. Buyer brokerage provides a reasonable and fair opportunity for both buyer and seller to have adequate representation. The current efforts of real estate agents to play both sides of the fence in the same transaction denies both buyer and seller proper representation and serves the interests of no one except the real estate agent.

Certainly, real estate agents are entitled to decide what kind of role they wish to play in any given transaction. However, if an agent chooses to assume a more limited role than either the traditional role of representing a seller or the newer role of representing the buyer and, instead, wishes to be more of a “facilitator” for the transaction with not much in the way of responsibilities to either party beyond making the initial introduction, the agent is entitled to do so. However, under those circumstances, buyers and sellers might reasonably expect to re-examine the amount of the commission (typically six percent) which real estate agents normally get for their services.

While on the subject of commissions, it might be noted that the historical justification for saying that the real estate agent is the seller’s agent exclusively has centered around the assertion that it is the seller who pays the commission and, therefore, is entitled to the exclusive loyalty of the real estate agent. In one sense, of course, it is true that the sales commission is deducted from the seller’s net at settlement. However, it is equally true to say that the commission is really paid by the purchaser as a part of the total price of the home. (In many cases, the purchaser puts enough cash down to cover more than the amount of the commission.)

In any event, obviously, if there were no commission payable on the sale, market forces would result in the buyer and the seller splitting the amount of the commission (with the buyer benefiting from paying a little less for the house and the seller benefiting by receiving a little more on the net.) Most of the new buyer brokerage arrangements realize the economic realities of this analysis by allocating half of the commission to the buyer broker and half to the listing agent.

Big Mistake #3: Failing to Recognize the Main Points in the Homebuying Process at Which Significant Conflicts of Interest May Arise.

In the typical residential real estate transaction, the real estate agents play extremely influential roles in shaping the transaction and coordinating the activities of the various participants. From the purchaser’s perspective, as noted above, the first thing the real estate agent does is to assist the purchasers in determining how much they can afford to spend for a home. Next, the agent typically assists the buyers in developing satisfactory criteria for the type of home they want, the location, etc. Once the purchaser’s financial and other criteria are established, the agent will typically have access to a computerized database of available homes which can be searched to identify a number of candidates that more or less fit the purchaser’s criteria. It is at this point that the first potential conflict arises.

Obviously, a real estate agent would prefer to sell one of his own listings because the agent would then get both sides of the commission, that is, the listing agent commission as well as the selling agent commission.

If not one of his own listings, the agent would, next, like to keep the sale within his own firm. (If the agent cannot keep the entire commission for himself, at least he can keep it within the same firm.) It is not likely that an agent would risk losing a sale just to keep the full commission in-house, so it is not too likely that this potential conflict of the real estate agent will seriously hamper the purchaser’s ability to find an acceptable home. It might delay the process a little, but probably not ultimately defeat it.

Once an acceptable home is identified, the potential for conflict becomes more serious. As noted above, unless the purchaser has hired a buyer broker, the real estate agent cannot represent the purchaser in negotiating a satisfactory contract. What happens is that the real estate agent pulls out the standard pre-printed contract form used by his brokerage firm and discusses with the purchaser what information to put into the blanks in the form. As noted in the discussion of Big Mistake #7, the sales contract forms used by most brokerage firms are heavily weighted in favor of the sellers (I have always thought it significant that they are invariably called “sales contracts” and not “purchase contracts”). The discussions under Big Mistakes 7 through 18 enumerate dozens of ways in which the typical form contracts expose the purchaser to unacceptable risks.

Once the buyer and seller have agreed on the terms of a contract, the real estate agent will normally offer to assist the purchaser in obtaining financing. Normally, the agent will recommend the purchaser to one or more potential lenders and will attempt to steer the buyer to the one or two or three lenders whom the agent prefers. Be aware of the potential conflict here. Some lenders are affiliated with certain real estate firms. Directly or indirectly, the real estate agent, her broker and/or her firm may receive referral fees or some other form of compensation from a lender to whom they refer business. Some of these types of compensation are legal, some aren’t. Legal or not, however, any type of consideration that the agent or firm receives may influence the agent to refer to business to a lender whether or not that lender happens to have the best rates and terms for the homebuyer.

In evaluating the financing offered by various lenders, a prudent purchaser will have her own checklist of information to obtain from each lender so that she can compare apples with apples (see Big Mistake #13 for additional details).

Next, the agent will recommend a settlement agent. Again, potential conflicts exist where the settlement agent is affiliated with the real estate agent or his firm or where the settlement agent pays any kind of compensation to the agent or his firm for the referral of business. Again, some compensation plans are legal and some aren’t. In any event, any additional compensation that may be earned by the agent for himself or his firm represents a potential conflict with the best interests of the purchaser (see the discussion under Big Mistakes #17 and 21).

Similar potential conflicts exist with any other referrals that the agent may make where the agent or his company may receive additional compensation from the individual or firm to whom the referral is made. This includes pest inspection companies, homeowner warranty companies, other types of insurance agents and agencies, etc.

The prudent purchaser must understand that referrals from real estate agents are vigorously solicited by every other player in the real estate settlement process, including lawyers, and there are few, if any, players in that process who will elevate the interests of the purchaser above the interests of the referring real estate agent. Whenever receiving a referral, the prudent purchaser will ask for at least two or three alternatives and will comparison shop for both price and quality of service.

Big Mistake #4: Failing to Understand the Role(s), Loyalties and Conflicts of the Settlement Agent

Although the provider of settlement services will frequently be a lawyer or law firm, few states prohibit non-lawyers from providing settlement services. Sometimes title insurance companies provide settlement services directly through their own employees. Sometimes settlement services are provided by other non-lawyer, lay individuals or companies. Almost always, these individuals are also title insurance company agents and/or agencies which earn their income from both settlement service charges as well as from receipt of a portion (often more than half) of the premiums paid for title insurance.

In order for a purchaser to understand the nature and extent of the services she will receive from a settlement service provider, it is essential for the buyer to determine whether or not the settlement agent is or is not an attorney (because non-lawyers cannot give legal advice) and whether or not the settlement agent (whether lawyer or not) is going to represent the interests of the buyer exclusively. Whether the settlement agent is a lawyer or not, the buyer needs someone at settlement who will represent the buyer’s interests exclusively.

Many attorneys who do settlements take the position that they do not represent either the buyer or the seller and that they are not attorneys for either party but merely escrow agents to conduct the settlement. Settlement service companies always take that position, that is, that they are merely escrow settlement agents and do not represent either buyer or seller. (A non-lawyer real estate settlement agent cannot represent a buyer at settlement since non-lawyers are prohibited by law from rendering legal advice.) With respect to loyalties and conflicts of interest, it should be obvious that an attorney selected by a seller is not going to represent the interests of a buyer at settlement. Likewise, in the case in which an attorney takes the position that she is merely an escrow agent and does not represent either buyer or seller, it is not likely that that attorney is going to make any waves at settlement when she depends upon referrals from that real estate agent for her business.

In a nutshell, the point is that the buyer needs to have his own attorney to represent his own separate interests at settlement and the careful buyer needs to be sensitive to the various other loyalties and interests that a settlement service provider may have which may conflict with the interests of the buyer.

Big Mistake #5: Failing to Understand the Role(s), Loyalities and Potential Conflicts of the Attorney

Referrals from real estate agents are extremely important to any real estate attorney, particularly an attorney who renders real estate settlement services. It is only natural that attorneys who receive referrals from certain real estate agents will be reluctant to do anything that might make the agent’s job more difficult or, at worst, “kill the deal” resulting in the loss of a commission to the agent. Least likely of all is that the attorney would suggest to the buyer that the referring real estate agent had been guilty of any kind of misconduct or impropriety in the transaction.

To make these observations is not to suggest that all attorneys are dishonest but simply to recognize the realities of human nature. It is unlikely that anyone will bite the hand that feeds him. In a business sense, it is also not very bright because, if you get a reputation for biting the hand that feeds you, nobody will feed you any more. This poses a real problem for a purchaser and emphasizes the importance of making sure that the attorney whom you select is really interested in protecting your interests exclusively, even if it means going contrary to the interests of anybody and everybody else in the transaction. In cases where clear conflicts manifest themselves, for example, where the settlement attorney is designated by a builder seller, it should be less difficult to persuade the prudent purchaser that she needs her own attorney and that she should not rely on anything said by the builder seller’s attorney. When and for what do you need the advice of an attorney?

The advice of counsel may be helpful in selecting a real estate agent. You might want to explore the new “buyer broker” approach. Or, maybe you know of a “for sale by owner” situation in which you and the seller can deal directly with one another and split the real estate commission you both save.

Sometimes a purchaser can save substantially more than the cost of legal representation where the purchaser does not have a selling agent and the listing agent can be persuaded to accept just the customary listing agent’s split (3%) of the total commission. The buyer and seller can share the savings from the remaining portion of the commission.

When you negotiate the purchase contract, even if you have bought a home before, you can benefit greatly from the counsel of a knowledgeable real estate attorney. Sage advice on changing a few words in a contract can save you many times over the cost of the attorney’s advice and can protect you from a mistake costing you thousands (see the discussions under Big Mistakes #7 through 18 for more details).

When you shop for financing, there are many tips that an experienced real estate attorney can give you that will save you considerable expense when the time comes for settlement (see discussion under Big Mistake #13 for more details).

Representation of counsel in connection with the settlement is not required by law but it is essential to make certain that the settlement documents are prepared properly and to make sure that you do, in fact, get what you have paid for (see the discussion under Big Mistakes #17 and 21 for more details). As noted elsewhere, there are plenty of folks who have bought homes and gone through all of these stages without the benefit of an attorney’s advice. I don’t really know of any studies or statistics identifying the percentage of deals that go through without any problems, but I do know this: in all my years as a real estate broker and a real estate attorney, and being aware of hundreds of deals that have gone sour, I cannot think of a single situation which would not have not been completely avoided or, at the very least, substantially ameliorated, if the unfortunate victim had had the benefit of counsel from a good real estate attorney before the problem arose.

One more thing: when I recommend that you consult a real estate attorney, I really mean a real estate attorney, an attorney with some significant experience in real estate matters. Would you go to a dentist for an appendectomy?

Big Mistake #6: Failing to Understand the Role(s), Loyalties and Potential Conflicts of Interest of Others Involved in the Homebuying Process.

The observations made above concerning the potential conflicting interests and loyalties of the real estate agents, settlement agents and attorneys apply with equal force to other providers involved in the homebuying process such as mortgage lenders, home inspectors, insurance agents, appraisers and termite inspectors.

There is a strong probability that the real estate agent will be an important source of referrals for each of these providers. Whether the referral is made by the real estate agent or some other provider, it is important for the prudent homebuyer to understand the potential conflicts of interests and loyalties that abound and to make sure that the provider hired is one who has the buyer’s interests uppermost in his heart even if it means saying or doing something that is against the best interest of the person who referred the buyer in the first place.

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