Love, Money + Relationships

Are You or a Relative Buying a First Home? Read This First!

This column originally appeared in Slate. I’m rerunning it so that you have another chance to enjoy it. I’ve also updated it to reflect some changes in the housing market since the last presidential election. Did I get the answer right? Feedback welcome!

Dear Pay Dirt,

Our oldest child is looking to buy a house with his two best friends. They have already started looking into getting pre-approved so they know what price range to look into. They are also setting up a joint bank account where each can deposit their share of household money (mortgage, utilities, groceries, and a little each month to save up for possible repairs).

I have recommended that they talk to an attorney to make sure they are covering their bases for co-owning a home with non-family members. I know there are different types of titles and that they should consider up front how they would handle things if one of them needs to move and the others want to stay. What other questions should they be checking with an attorney about, and what other considerations should they be talking about amongst themselves?

My husband and I have told them we’re happy to accompany them on tours of prospective houses to help them ask the right questions, and keep them from falling in love with a place before they’ve seen things like the house inspection. It’s been 20 years since we bought our house. Are there any questions we didn’t have to ask then that we should be asking now?

—Kids Just Wanna Buy a House

Dear Kids Just Wanna Buy a House,

I love that your kid is making such a smart choice for himself. The earlier you can buy a house, the wealthier you’ll be later in life.

Buying a first home is exciting, stressful, and scary, especially now. The real estate market is in a place it’s never been before: Interest rates are high, and so are home prices. In a normal economic model, when prices rise demand falls. Unfortunately, according to economists, the U.S. housing supply is short by around 3.8 million homes. So, the real estate market is behaving strangely.

The good news is your kid and his friends are on the right track. The attorney should set up a partnership agreement that outlines how much they are each putting into the deal and how they can exit should the need or desire arise. They’ll need to decide whether to buy as joint tenants, with rights of survivorship, or as tenants in common, where they each own one-third of the property. They’ll also need to write wills once they own real estate, just in case something happens. Finally, they need to decide how much they can afford to spend. Getting preapproved, rather than prequalified, means the lender will commit in writing to funding the loan, provided the property appraises out in value. It’s the right move.

Other issues will pop up, and how they deal with them will tell a lot about how well they work together as a group. As I recommend in my book, 100 Questions Every First-Time Home Buyer Should Ask, they should each make a Wish List and Reality Check. The wish list is everything they want in a home, including the neighborhood, school district, size, shape, look, and feel of a house. Go right down to the kitchen appliances, if that’s important. The Reality Check is everything you can’t live without. For example, you might want a four-bedroom, three-bath house but absolutely can’t live without two bedrooms and two-and-a-half baths. They should all prioritize their separate lists, then come together and make a single list. Negotiating in good faith is a useful skill for this group to have.

Here are a few other things to think about. First, we’re mostly in a hot seller’s market, where buyers are often scrambling to make the winning bid. But not everywhere. As I write this, the housing market is cooling (a bit) in Florida, Austin, TX, and other places. So, they should choose an experienced real estate agent who does a lot of first-time buyer deals and may be able to guide them to finding a good deal.

Also peculiar to this market are pocket listings, which happen when listing agents advertise a property internally, to other agents in their company, before publicly listing it, giving them first dibs at bringing the property to their colleagues. Technically, pocket listings (known officially in the National Association of Realtors code as Section 17: Clear Cooperation) are against the Realtor code of ethics. However, they’re commonplace right now, and the rules are changing. I don’t think they’re good for sellers, because I think you want to showcase your home to as many buyers as possible. But if your buyer’s agent is well-connected, it could work in your favor.

Finally, in April 2024, the National Association of Realtors and some of the biggest real estate companies entered into a $418 million agreement that will supposedly change the way home buyers and sellers pay commissions when they purchase and sell property. Going forward, listing agents can’t advertise that they will split the commission with the buyer’s agent. The buyer is supposed to be responsible for paying the commission. And supposedly, with the listing agent taking only half of the total commission, the seller will lower the sales price.

There have been a lot of headlines proclaiming that this settlement will make things easier and cheaper for buyers and sellers. I disagree. I don’t think anything will change, and the agents I’ve been speaking with since the settlement came out tell me that’s how it’s playing out. But your kid and his buddies will have to sign a new agreement with their buyer’s agent saying that they will pay the agent’s share of the commission. Hopefully, they can work with the buyer’s and seller’s agent to ensure the commission gets paid out of the sales price, and doesn’t require them to do some fancy footwork with their lender.

How would you have answered this question? Feel free to email me at Questions@thinkglink.com or leave a comment below:

Thanks for reading. I’ll type to you again, soon.

Ilyce