Buying a house? Trust no one

In last issue’s editorial, I mentioned I recently plunged into Toronto’s deranged housing market. I quickly discovered that buying a house is expensive, bewildering and stressful. To make the process a little easier, I hired a trio of professionals to look out for me: a real estate agent, a mortgage broker and a lawyer. Or at least I thought I did. By the end of the process, I realized that some of the people I thought I hired to work for me were secretly working for someone else. Here are five lessons I wish I’d learned before buying.

Follow the money. The first lesson is that if you don’t understand how your real estate agent, your mortgage broker and your lawyer get paid, you won’t understand where their allegiances lie. As a buyer, I thought my agent was working solely for me, but it turns out she gets paid by the seller of the house, splitting a 5% commission with the seller’s agent. My mortgage broker wasn’t paid by me either, but by the financial institution that provided my mortgage. And my lawyer—I thought he at least was working just for me, but it turned out even that wasn’t true, which I’ll get to in a bit.

How does that affect their service? The problem is, you may think someone is working for you when they’re not. I hired an agent to help me negotiate the lowest possible purchase price on a house, but there’s a conflict there, because the higher the house price, the more she gets paid. Similarly, my mortgage broker not only gets paid a commission by the financial institution that provides my mortgage, but he gets paid more if he locks me in at a higher interest rate! To me that’s a stunning conflict of interest, and it wasn’t revealed until I signed the mortgage papers.

You still have some control. Remember that your agent won’t get paid a penny unless you actually buy. So if you feel you’re not getting good service, you can politely but firmly tell your agent that you’ll terminate the relationship if things don’t improve. The brokerage tries to prevent this by having you sign a “Buyer Representation Agreement” that locks you in. But you can limit the term on that before signing, and most agents will let you out of the agreement if it becomes clear that they’re not going to get a sale.

Close the information gap. You’ll only go through the buying or selling process a few times in your life, but your agent, broker and lawyer do it every day. If your goals aren’t aligned, they can use that imbalance against you. When it came time to buy title insurance, my lawyer recommended one product, but I found a better one on my own. It turned out the one he recommended paid a commission, and the one I found didn’t.

The system still works. Agents rely heavily on word-of-mouth recommendations for new clients, so despite some inherent conflicts, a good agent will work hard for you to make sure you’re satisfied. In the end, my agent convinced me to drop my offer in a bidding war by almost $40,000, and she was absolutely right—I still got the house. Without her expert guidance, I would have severely overpaid. After some prodding, I got a good rate on my five-year fixed mortgage from my broker too (2.79%), and even my lawyer came through, although at the last minute I discovered that he also represents my mortgage lender, a fact he didn’t disclose until closing day.

The truth is that even though the system is far from transparent, most of us need that professional help. So do your best to find some decent, experienced assistance and treat them well. But remember: They’re not your friends. Not until the sale closes, anyway.