The federal agency that is supposed to help veterans save money when they buy a home has come out against a cost-cutting technique that consumer protection groups and Congress agree should be encouraged.
The Veterans Administration has taken a public stand against use of "buyer brokering" in connection with VA loans, despite strong evidence that the plan reduces home buyers' costs and fees.
Congress amended the National Housing Act last year to allow buyer brokering in connection with FHA home loans. However, the VA's housing statute, which comes under separate congressional committee jurisdiction, went untouched. Now the VA says it doesn't want to open its GI loan program to buyer brokering, even if the technique saves veterans money in some instances.
In a buyer-broker arrangement, a home purchaser hires a real estate agent to search and negotiate for a residence at the lowest possible price and the most advantageous financing terms. The broker works exclusively for the buyer and is compensated solely by the buyer, much like an attorney, accountant or other professional retained by a client. The compensation is virtually always cut-rate, a set dollar amount--often $1,200 to $2,000--or a commission of 2 or 3 percent of the sale price.
This is in contrast to the traditional relationship, where a home seller hires a broker who is compensated by a commission tacked on to the sale price of the home. The buyer, who indirectly pays the real estate commission through the sale price, is represented by no one, unless he or she hires an attorney. Buyers commonly misunderstand the traditional relationship, believing that sales agents showing them various houses are working directly on their behalf.
Buyer brokerage has been common in commercial real estate for many years, but it's relatively new to the home-purchase field. Real estate agents in a growing number of cities offer a "buyer representation" option to clients, and can readily demonstrate that it saves significant sums of money.
One of the most active proponents of the technique, Seattle, Wash., broker John Hale, says his discount-fee agents routinely save home buyrs thousands of dollars on prices, settlement costs and other charges.
In a recent transaction, according to Hale, he negotiated a nearly $15,000 cut in the price of an $85,000 house, and arranged highly favorable financing. His fee for the entire purchase was $1,250.
"Had I been working for a commission from the seller," Hale says, "obviously the final price would have been much closer to the $85,000 than to $70,000. My efforts would have been bound legally to the seller; my job would have been to get the most out of the purchaser."
Buyer brokers save money for their clients "even when the seller refuses to cut his price," according to Hale. That's because their cut-rate fees are subtracted from the official sale price and cut subsequent closing costs. The owner of the home receives the net dollars-in-the-pocket price he wanted. But the total commissions paid are lower.
For example, if an $80,000 new home were sold by Hale's firm but listed by another broker, Hale would be entitled to a standard 3 1/2 percent cut of the seven percent commission (the listing realty firm would receive the other 3 1/2 percent). Hale, however, would ask the seller to subtract 3 1/2 percent from the sale price, a $2,800 cut that would in no way lower the net proceeds to the seller. The price would then stand at $77,200, and Hale would be paid his $1,250 fee from his client, the buyer. Besides shaving $1,550 off the price of the house, the buyer would also have lower settlement costs and taxes (typically 3 to 4 percent of the sale price), for an additional saving of $100 or more.
The buyer-broker concept has gained the support of groups like Consumers' Union, and became a federally endorsed practice through the 1981 housing act.
The VA, though, continues to prohibit veterans from engaging a buyer broker in connection with its guaranteed loan program. In a letter to House Veterans Affairs Committee Chairman G. V. "Sonny" Montgomery (D-Miss.), a top VA official explained that although "there may be some instances in which a buyer broker could benefit" veterans purchasing houses, "we do not believe any changes in the basic VA program are warranted at this time."
The "traditional method employed in real estate transactions has worked well," wrote VA Chief Benefits Director Dorothy Starbuck, and the agency doesn't care to alter that tradition.
Seattle broker Hale, whose inquiry to Montgomery prompted the VA's response, says, "It's utterly ridiculous that every American now has the legal right to engage a buyer broker except a veteran using a VA home loan."
Rep. Montgomery has referred the buyer broker issue to a Veterans housing subcommittee, but a staff aide said there's no plan to do anything this year unless "we hear from people who think this really needs correction." Otherwise, "We go along with what the VA says."
(For anyone interested in communicating with Montgomery, his address at the Veterans Affairs Committee is 335 Cannon House Office Building, Washington 20515.)