Do You Have to Pay Closing Costs Without a Realtor?

Many buyers wonder if they can avoid paying closing costs when purchasing a home without the help of a realtor. Unfortunately, the answer is often yes. Closing costs encompass various fees that are necessary for the transfer of property ownership, and these fees are typically still due even if you choose to navigate the home buying process independently.

Understanding Closing Costs

Closing costs can include a wide range of expenses, such as: Loan origination fees: Charged by the lender for processing the loan. Title insurance: Protects against any disputes over property ownership. Appraisal fees: For assessing the property's value. Inspection fees: For checking the condition of the property. Recording fees: For filing the property transfer with the local government. Transfer taxes: Taxes imposed when the property is transferred from one owner to another.

The Past and Present of Real Estate Brokerage

For many decades, realtors who represented buyers would often work on a verbal agreement, relying on a handshake deal to secure their services. The brokerage that the buyer's agent worked for would receive a split of the commission, and a significant portion would be paid to the agent themselves. However, in some cases, agents would put in considerable time and effort only to have the buyer go with another agent or opt for a For Sale By Owner (FSBO) listing. These situations led to the agent receiving no compensation for their work.

Historically, agents trusted such handshake agreements more than written contracts. However, the landscape of the real estate brokerage has changed significantly since the National Association of Realtors (NAR) settlement in the amount of $417 million. This settlement led to a shift towards more formalized agreements, where both buyer and seller brokers are required to sign contracts that outline the terms and conditions of the representation.

Shift to Formalized Contracts

Now, buyer agents are required to sign contracts with potential buyers before starting the home search process. These contracts often stipulate a minimum payment or a percentage that the buyer agent will earn once the transaction is complete. This change means that buyers are more cautious about engaging with agents and less likely to make a deal with a cousin's agent or another FSBO listing at the last minute.

How This Change Benefits Buyer Agents

The formalization of contracts has several benefits for buyer agents in the real estate process:

Increased compensation: Buyer agents can now charge commissions based on their experience and the value they bring to the transaction, rather than the old model where they received only a fraction of the commission from the seller's side. Greater fiduciary responsibility: Buyer agents are more likely to prioritize the interests of their clients, as they are legally obligated to act in the best interest of the buyer under the terms of their contract. Stronger bargaining position: Agents who are better negotiators will find it easier to advocate for their clients, leading to more favorable terms in the home buying process.

These changes have the potential to improve the entire home buying process, making it more transparent and beneficial for buyers.

Conclusion

While you may save on the commission fees that a realtor would charge, other closing costs are still unavoidable when purchasing a home. By understanding the components of closing costs and the new requirements for formalized contracts, buyers can better navigate the home buying process and make informed decisions.