I’m a Realtor — I Always Want My Clients to Ace This Quiz
As a real estate agent, it’s my job to guide homebuyers and sellers through the process of a real estate transaction. Even though I’m the one with the expertise, I urge my clients to become familiar with the ins and outs of homebuying, making it a point to teach them about the new terms they’ll come across.
With that in mind, I created a quiz about the basics of real estate that I want all of my clients to ace. Before you put your property on the market, see if you’re a savvy homebuyer or seller with this quiz.
Who decides the sales commission amount?
A. The buyer
B. The seller
C. The seller’s agent
D. The seller’s brokerage
Answer: The answer is both B and C. The agent representing the home seller sets the desired commission amount that will be paid to both agents (and their brokerages) upon completion of the property sale. But homeowners certainly have the right to negotiate remuneration before agreeing to representation.
In addition, the agent’s brokerage usually has a minimum percentage to which they’ll agree. A homeowner might convince their agent (perhaps a friend) to represent them for, say, just $500. If the agent also runs his own brokerage agency, that would be allowed. My first brokerage, for instance, did not allow commissions less than 4.5 percent total versus the standard 5 to 6 percent. When all parties agree to the commission rate, that amount is then stipulated in both the listing agreement and sales agreement.
What is escrow?
A. An account overseen by your lender to pay PITI (principal/interest/taxes/insurance) on your behalf
B. A neutral third party that holds funds and assets for the duration of a property transaction
C. An impound account
D. A Middle English word — escrowl — meaning “scroll” (essentially a checklist)
Answer: All of the above! The word escrow can denote several financial matters, but in a real estate transaction it commonly defines the neutral third party that holds funds and documents until all written conditions are met. Escrow companies charge a small percentage of the property’s price to handle the buyer’s deposit and copious paperwork. (In California, it’s $2 per $1,000 of the property price plus $250; the cost is evenly split between both parties.) They oversee the title company efforts as well. Per answer A, an escrow account can be used by the buyer post-sale to empower their lender to pay ongoing taxes and insurance.
What is dual agency?
A. Conflict between Hollywood agencies
B. When one agent works for two brokerages
C. When an agent represents both buyer and seller
D. Two agencies participating in a property sale
Answer: The answer is C. Should a listing agent bring a buyer to the table, they are permitted to represent both parties in the transaction. Such a possibility should be discussed during the listing negotiations, so the seller understands the possible ramifications. I once graciously reduced my commission when I ended up representing both parties even though it wasn’t stated in the listing agreement. My financial sacrifice resulted in another sale with the homeowner.
What are contingencies?
A. Actions that need to be performed prior to the close of escrow
B. Obstacles that can derail an escrow
C. Instances when a buyer’s home needs to be sold first
D. Clauses that allow parties to back out of escrow
Answer: All of the above. There are many “Contingent On” line items in a residential purchase agreement. The most common are appraisal, loan, inspections, and home sales. Buyers have a certain amount of time during the escrow period — commonly 30 days — to remove each contingency as they are achieved (e.g., 17 days) to ensure the transaction is on track to achieve completion. Sellers have the right to back out of a sale if any of these time-sensitive actions fail and can demand retention of the earnest money. I once represented a client buying a Palm Springs condo for her brother who died one day before escrow closed! The seller wanted to keep the deposit, as all contingencies had been removed. Thankfully, cooler heads prevailed and the unhappy seller demurred from pursuing arbitration.
What’s earnest money?
A. Funds meant for a serious purchase
B. Reference from the film Ernest Goes to Camp
C. Another term for down payment
D. Funds provided at escrow commencement to signify a serious offer
Answer: The answer is D. Also termed good-faith deposit, an earnest money deposit (EMD) of 1 to 3 percent of the sales price is wired to escrow within days of an accepted offer. It demonstrates buyer commitment by putting “skin in the game.” Escrow retains the funds in a non-interest-bearing account. At close of escrow, the funds are then applied to either the down payment or closing costs.
The EMD is typically refunded if the buyer backs out of the sale for legitimate reasons (e.g., the house doesn’t appraise for the agreed-upon price or major defects are found during the inspection, or the buyer dies the day before it’s finalized!).
Does the home seller have to accept a full-price offer?
A. Yes, why wouldn’t they?
B. The seller is under no obligation to accept any offer
C. A legitimate offer must be accepted
D. Only if it meets the criteria in the listing agreement
Answer: Both B and D. If an offer meets the listing requirements (i.e., full price with lender pre-approval) a buyer will usually happily accept the offer. However, in a hot seller’s market, the owner may permissibly hold out until a better offer is received (e.g., higher price or waiving contingencies).
Because each offer is a sum of its parts, a good Realtor will advise their clients on the pros and cons of an offer. For instance, if a lower cash offer is received along with a full-price one, the seller might choose to accept the former, as it carries no loan or appraisal contingency — two considerable lender-side elements that can derail an escrow.
The reason for Answer D? A seller and Realtor sign an agent agreement establishing the Realtor’s duties, the primary component of which is to bring a qualified buyer to the table. If the agent does so but the homeowner decides to remove the listing from the market, he hasn’t held up his end of the bargain and the contract has essentially been breached. The Realtor would be within her rights to demand the promised commission, as she’s fulfilled her side of the agreement. I have never witnessed this, but it remains legally possible.
Can a home sale be fun?
C. Why not?
D. Of course!
Answer: The best answer is C. A property sale is a huge financial transaction involving many parts and players — agents, brokerages, escrow and title agencies, inspectors, appraisers, and vendors. The implications for each participant are significant and can be stressful when buyers or sellers aren’t accommodating, inspections turn up termites and water leaks, appliances need repair or replacement, Wreck-It Ralph repairmen make things worse, or deadlines get pushed.
My sage advice? Secure the representation of an experienced Realtor to guide you through the process and ensure a calm, (relatively) stress-free process from MLS to key-handover … with a satisfied buyer and seller, to boot. I promise it’s doable. Then, you won’t blanch at the next prospect of buying or selling property.