Easily Save $10,000 On Your Next Home Purchase

I was meeting with a friend the other day, and as conversations I'm engaged in often do, the subject turned to real estate and mortgages. I got on my soapbox about the fact that the reason so many people get screwed in real estate is because there is an information gap between consumers, and real estate and mortgage professionals.

In economics, any time there is an information gap, it leaves room for one party (the one with more information) to take advantage of the other, and hence, hinder mutually beneficial exchange.

The great thing for real estate pros is that consumers don't even know they are getting the short end of the real estate stick. Consumers are more than content to pay exorbitant amounts of money to professionals because they don't technically know that how they are paying them.

In the future I will focus on how to save money in your transaction by doing a few simple things, and giving you information to bridge the information gap created by real estate agents and mortgage brokers.

To get started, I'll fill you in on the indirect costs paid by consumers in real estate.

Indirect costs are fees that you don't technically pay for out of pocket, but you are essentially paying for them by either paying more for a house, or having a higher interest rate. One example of indirect costs in the real world is when the price of virtually all consumed goods increases when the price of gas increases. Expensive gas means it is more costly to ship the goods to market, since that effects a companies bottom line, they are forced to compensate for it by increasing the price of the good provided.

In real estate, consumers pay 2 primary indirect costs. First, buyer's real estate agent commissions. I don't know how many times I've heard a buyer's agent say, "My services are free." and want to call them out on it. They are able to say their services are free because YOU don't pay them, the seller does. And just as the price of gas effecting the price of a commodity, the price you have to pay an agent effects the bottom line of a seller, and the seller would like to increase the purchase price of a home by 3% in order to compensate for the lost proceeds. Tomorrow, we'll look at the Realtor trap and how to avoid paying such a huge indirect cost.

The second indirect cost that confronts consumers is called the "yield spread premium". Most people have never heard of this, simply because mortgage professionals would rather you not know about it. Mortgage and real estate professionals are all about trying to keep the information gap between you and them as wide as possible. YSP is basically a kickback payed to a broker or bank for increasing the interest rate, to make the loan more desirable for investors to service. Next time you meet with your broker, ask them how much they are making in YSP, and make them reduce it, regardless of how much it is. In a few days we'll look at YSP a little more and discuss how to avoid it, and when to make it work in your favor.

Look forward to hearing questions from everyone.

Tibbs