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The Money with Katie Show
How Much Down Payment Help from Family Makes Buying a House Affordable?
00:44:03
Plus, what to keep in mind about the recent NAR ruling.
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- [00:00]
Katie Gaddy Tossan
Hey Fidelity, what's it cost to invest with the Fidelity app?
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Hannah
Start with as little as $1 with no account fees or trade commissions on U.S. stocks and ETFs.
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Katie Gaddy Tossan
Hmm. That's music to my ears.
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Hannah
I can only talk Investing involves risk.
- [00:18]
Katie Gaddy Tossan
Including risk of loss.
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Hannah
Zero Account fees apply to retail brokerage accounts only. Sell order assessment fee not included.
- [00:21]
Katie Gaddy Tossan
A limited number of ETFs are subject.
- [00:23]
Hannah
To a transaction based service fee of $100. See full list of Fidelity.com commissions Fidelity Brokerage Services LLC Member NYSE SIPC.
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Katie Gaddy Tossan
Rich Girl Roundup.
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Hannah
You could fit a full bouncy castle in this backyard and have you considered that?
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Katie Gaddy Tossan
I mean, that would be one of the first things I'd do for my dog.
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Hannah
Welcome back to the Rich Girl Roundup weekly discussion of the Money with Katie Show. I'm Katie Gaddy Tossan and this is your favorite place to spend a Monday morning with me and my executive producer Hannah where we use this segment to talk through all sorts of money related topics right after a quick break. You want a home soon, but you also want kids someday. So how do you balance both financial priorities? Emma and Tom weren't sure how much they could afford to buy in New York City given that childcare was going to be a major expense one day. But by working with the flat fee CFP at Domain Money, they learned exactly how much they would need to save for a more affordable home and to allow for quality childcare. And get this, if they had stayed their previous course, their original budget would have been overextended by nearly a quarter of a million dollars. And instead they're avoiding expensive mistakes and they're set up for long term financial success. If there is a large purchase coming up in your life, you need a financial plan. I started working with an incredible flat fee CFP at the beginning of this year and guess what? You can hire her too. Her name is Katie Song at Domain Money. Book a free strategy session with Domain Money and then select Katie or anybody else on her team of CFPs that she has trained herself and your advisor will create a step by step financial plan to help you achieve your goals. All for a one time flat fee. They will answer all of your questions and create a straightforward plan for your life. Start building your financial plan today with domain money@moneywithkatie.com domain money that's moneywithkatie.com domain money I'm a real client of Domain Money via my employer Morning Brew. I receive compensation and have an incentive to promote Domain Money. See important disclosures at DMNMNY co X okay, so before we get into today's episode, this week's upcoming main show is in honor of our Wealth Planner launch. That's right baby. The 2025 wealth planner dropping this week. And one of the features that we spent months developing is a comprehensive financial independence timeline that takes into account everything from temporary expenses to one time large purchases to inheritances to pensions to Social Security and more. We also made it way easier to differentiate in the planner between long term investments and investments for other things to avoid inflating your fine number if you are investing for a lot of different stuff at one time. We also added a drawdown simulation by Popular Demand so you can see what's happening when you quit working. Very fun. Very cool. So on Wednesday we're going to talk about what it takes to calculate a truly accurate FI timeline in honor of the Wealth Planner release. So if you are interested, you want to be notified when it drops and you want an exclusive 25% off discount code, which is the largest discount that we will offer all year. You can sign up in the show notes to get on the waitlist and we will slide into your Gmail DMS when it is time. But in the meantime, onto the roundup. Hannah, what is our question today?
- [04:18]
Katie Gaddy Tossan
Well, we're back on the Money with Katie show where you ask complicated hypotheticals and Katie runs the math to see what's better. Everyone's favorite this week's question came from rich girl Lauren. She said, I live in an expensive housing market where it makes more financial sense to rent if I'm only pulling from my own resources. But my parents want me to buy and are willing to contribute to the down payment if I choose to do so. Not classic for me, baby. You can. They can call me if they have. If they want someone to buy. In my ideal world, they would just give me the money now and let me invest it how I want. But I don't feel comfortable asking for that. But even with their help, my monthly housing payment would be higher than it is now, so I'd need to reduce the amount I'm investing. But part of me is tempted by the immediate bump in the asset section of my net worth spreadsheet design Wealth Planner though, and it feels like a cash infusion would move me toward my financial goals even with a lower savings rate going forward. Any advice on how to consider a windfall conditional on buying when running the rent and buy numbers and we haven't done one of these in a while.
- [05:20]
Hannah
And all Mike rubs hands Together we're back fires up spreadsheet. The other really cool thing, honestly, about the scale that we have reached now with this show is that there are people in our audience who are way bigger nerds and have way better math, like, way better grasp of math than I do.
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Katie Gaddy Tossan
I said that they're better at math. You have to call them out.
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Hannah
We actually got. There was an episode, I'm not sure if you all will remember it, but we did an episode a couple months ago where the person was like, should I pay off this HELOC faster or continue contributing the maximum to my pre tax 401k? And we had like reached the conclusion on the show that because of the tax break, it was better to continue funding the 401k at like full tilt. I think the person emailed him was like, yeah, I'm still going to pay off the HELOC because I just don't like having debt. And we were like, all right, that's fair. But someone had reached out and was like, hey, I built a model that actually fully takes into consideration every single thing. And like, yes, you underestimated how much better off they are contributing to the 401k. And I opened this document they sent me. It was enormous.
- [06:27]
Katie Gaddy Tossan
Like they had spreadsheet, right?
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Hannah
It was a huge spreadsheet and they had factored in so many different things. And I was like, okay, amazing. So I feel confident that when we do these, we will hear from people who will tell us if we are missing things and then of course, we will always come back and note any important omissions. But in the meantime, we went ahead, we asked Lauren for all the numbers so we could really model this out, talk through it. And similarly to past episodes of this nature, the intent in sharing this, like, very specific hypothetical is that my hope is that walking through the thought process will be illustrative for how to piece information like this together. And so you can kind of think about, okay, how could I solve similar types of like, financial opportunity cost problems?
- [07:15]
Katie Gaddy Tossan
Makes sense. Ready to go run through?
- [07:17]
Hannah
Yeah, let's do it. Okay. So her rent is $2,100 per month. That is her half of a two bedroom, one bathroom apartment with her partner.
- [07:27]
Katie Gaddy Tossan
Okay.
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Hannah
She earns $130,000 per year and she is currently contributing 11% of her paycheck to a pension and around $1,800 per month to her pre tax 457B. So to make matters easy, I just plugged all of that into the Wealth Planner to get a quick estimate for her take home pay, it's around $5,800 per month after she makes those contributions of around $2,900 to those various retirement vehicles and pays taxes and whatnot. So for those of you doing the math in your heads, she is basically investing about 35% of her post tax income for retirement.
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Katie Gaddy Tossan
Good for her. That's amazing.
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Hannah
Crushing it.
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Katie Gaddy Tossan
Yeah.
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Hannah
She also has $200,000 invested already in a taxable account. But she mentioned that is not her top priority right now. Like I don't think she's actively making major contributions to that. And then quickly, just a little bit more math. Sorry, there's going to be a lot of math today. Her $2,100 per month rent is approximately 24% her post tax income. So just that we're all like tracking here. She's in a great spot with her current housing costs as far as her income goes. And this is the kicker, equivalent housing in her neighborhood. So we're talking a two bedroom, one bathroom condo cost between $900,001.2 million. So she sent for one bathroom for one, for one toilet. Bathroom. Can you imagine spending a million dollars for a single toilet?
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Katie Gaddy Tossan
One single toilet.
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Hannah
We could never.
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Katie Gaddy Tossan
Could never.
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Hannah
We could never. I won't even in places that only have one toilet because I have such anxiety that someone is going to be using it when I need it. And that's on getting my December colonoscopy centering. And she sent Zillow links to us to, to prove it.
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Katie Gaddy Tossan
Okay.
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Hannah
And her parents are willing to offer her 200 grand for a down payment, but they're offering it to her in the form of either a 0% loan that she will need to pay back or as co purchasers on the property who will then own that percentage of the equity is my understanding.
- [09:26]
Katie Gaddy Tossan
Okay, I think that all tracks. So I mean besides the fact that she would only she pay over a million dollars and get one singular toilet, how would you pencil out kind of how this works?
- [09:37]
Hannah
All right, so I'm going to assume that she's going for something kind of in the middle range of that price range. And let's say she finds a place for $1,050,000. Her parents are loaning her 200k so she's going to put that down. Right. And I'm kind of ignoring like closing costs and all of that. Obviously that, that does really matter here. But I'm trying to look at long term where this lands. So I don't want to get too caught up in the details, but she'll put that 200k down. She'll need to borrow 850,000 from the bank. And with an interest rate of 6%, the monthly payment on the principal and interest will be 5100. Oh, and then we obviously still have to add in property taxes and insurance. And potentially, if it's a condo, I'm going to assume there's HOA fees, kind of honestly even ignoring that. But her total monthly payment will be roughly $1,000 more conservatively, or around $6,100 per month.
- [10:34]
Katie Gaddy Tossan
Oh, I'm scared. I mean, so obviously she could refinance in the future, but we're not assuming that she does that at this point, correct?
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Hannah
Yep. Okay, 100%. So, as we know, she is currently splitting her rent, so it's not quite fair to compare her $2,100 half of rent to a $6,100 monthly payment of servicing debt. It's more apples to apples to compare the $4,200 in rent to the $6,100. If they continue to split the monthly payment, her quote, unquote, half after buying will be about $3,050, or about $950 more per month than she is paying now. And I'm saying half in quotes because, like, as far as the bank is concerned, as far as the property tax assessor is concerned, she is responsible for that full payment. But obviously, we're assuming that the living situation will continue and someone else will be living there and paying for half of it.
- [11:32]
Katie Gaddy Tossan
I guess I'm just worried that if she and her partner were to break up and the partner had been paying towards the mortgage, but I guess we can get to that.
- [11:39]
Hannah
Hannah, you're. You're stealing my thunder.
- [11:42]
Katie Gaddy Tossan
Oh, I'm so sorry.
- [11:43]
Hannah
Okay, so I wanted to flesh out the comparison between her total rent and assuming it's increasing by 3% per year, as we know, rent goes up and her total monthly payment first, just to see at which point in the future her total rent would eclipse her cost of ownership. Assuming that that rent increases by 3% per year and her taxes and insurance never change, which I think we're talking about someone that lives in San Francisco, which, if you know anything about San Francisco, you've got earthquakes, you've got fire, you've got all sorts of things that could impact your insurance. But we are going to assume that none of that ever changes. It would still take 14 years for her rent to cost more than the cost of servicing that debt to the bank. And obviously, like the other associated costs of Ownership. So.
- [12:38]
Katie Gaddy Tossan
So right now things are leaning towards renting.
- [12:40]
Hannah
Yeah, things are not looking so hot for buying yet. Yet. Right. Presumably all that time she could be investing the cost difference. And she alludes to this in her question, that she is afraid she will have less to invest if she does this. But as we know, that gap will close over time. Rent does go up. Theoretically, your monthly cost of ownership should be relatively level, even though there are more surprises when you're a homeowner. And as of right now, we know that that gap closes after 14 years. So if she invests her half of the difference because she is not paying the full price in either renting or buying in this situation, Right. In an s and P500 index fund, and she gets 6% average annual returns until year 14, she would end up in year 14 with around 150k in an investment account. But crucially, no property. She doesn't own the place that she lives, so that's worth knowing.
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Katie Gaddy Tossan
But then her parents are offering this $200,000 down payment assistance.
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Hannah
Yes.
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Katie Gaddy Tossan
So how would we figure that out?
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Hannah
So this is why this case is unique, because ordinarily we would have to look at the opportunity cost of that $200,000 down payment. We'd have to say, okay, well, it's. You could put it into a house, but like, what would it do in the stock market if left alone? But it sounds like she only gets access to this 200k if she uses it to buy a house. So her opportunity cost in this calculation is backwards from how we would normally run it. It's also unique because she is sort of house hacking. Like she has a partner who is paying half of the monthly payment, or I should say she would be house hacking. There would be another person whose income is paying down that mortgage. But I guess if they get married, that equation does kind of shift a little bit. Because right now this is someone whose income is not fueling her saving and investing, and their spending is not affecting her spending. But if they get married now, theoretically, it's like one household, you together are responsible for servicing this payment. So it's a little bit less you have a roommate or a tenant, and more like it's all just coming out of money that would have been, quote, unquote, yours anyway.
- [14:57]
Katie Gaddy Tossan
Okay, that makes sense. Does that make sense?
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Hannah
Okay, so that said, it does sound as though her parents expect her to either pay it back or enter into it sort of like a business agreement, and invest that 200k as like an equity stake in this property. So if we go the pay back the 200,000 route. My question would be, are you paying back $200,000 over the same term as the mortgage? Like, are you, are they expecting you to pay it back as you go? Because if so, you're looking at like, is it almost like you're getting a second 0% mortgage from your parents where you're spending $555 a month to pay them back?
- [15:36]
Katie Gaddy Tossan
Because it reminds me of when people say I'm going to borrow from my 401k and for my down payment. It's kind of the same thing where you have to also pay them.
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Hannah
Yeah. You're like, well, you're going to have to pay it back.
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Katie Gaddy Tossan
Yeah. So that sounds like a pretty penny.
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Hannah
Yeah. And so with that added to the projections, you're getting the 200k bump up front, but your opportunity cost of the extra expense of owning goes up pretty considerably from 140,000 in a, you know, investment account by year 14 to around 230,000. I'm sure that there are other options here. These are obviously her parents. They clearly have a vested interest in her owning where she lives or they're, they want her to and are willing to subsidize that. In part. I think that there's like another element here of if they, she just has to pay the money back when she sells it eventually.
- [16:21]
Katie Gaddy Tossan
Right.
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Hannah
That would I think kind of change the game a little bit because then you're not paying it back as you go and so you have a little bit more money now to do other things with. But if we aren't paying it back, but they're getting an equity stake, my assumption is that that percentage, around 20%, you know, whatever they're putting down of future gains would theoretically belong to them or they would have claim to it based on the way that they said they'd want to enter into it as co owners. The only thing that's interesting about that is that in the submission she said her parents said she could keep all the gains, but she would have to repay the 200,000 when she sells it.
- [16:56]
Katie Gaddy Tossan
So she's basically on the hook for only 200,000, nothing else.
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Hannah
It does sound like that's the case. Yeah. Okay, so a lot of complexity in the hypothetical. But like I would say at the end of the day, if she gets to decide, I believe the better structure for her is to pay it back when she sells it. Say, okay, I sold the property, I've lived in it for however many years. Here's your $200,000 back and like, we'll get into what type of growth would be. We'd be assuming in order to see if she's like, coming out ahead, basically.
- [17:25]
Katie Gaddy Tossan
Okay, so that makes sense. So now we have to assume what that appreciation looks like, what the sales price is going to be and when she decides to move. So how would we decide that?
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Hannah
Yes. So we're talking now jumping into the future, selling some point in the future. So I looked up appreciation in her zip code. Over the last 10 years, property in her city has appreciated at a rate of about 5.1% per year. If we go back to 2000 and have like a fuller picture, it's 4.27% per year. So I'm going to assume 5. I'm going to go kind of in the middle. Well, really closer to the upper end, and then effectively figure out what would happen in the future if she takes their offer, structures it such that she only pays back the 200,000 after she sells. And accounting for the opportunity cost difference of her rent versus mortgage for those 14 years that she's spending a lot more on housing.
- [18:25]
Katie Gaddy Tossan
Behind the bright lights and adrenaline of pro sports is an equally exciting world of negotiations and deal making.
- [18:31]
Hannah
That's what we cover each week on.
- [18:33]
Katie Gaddy Tossan
Our podcast, the Deal. I'm Alex Rodriguez, former baseball player turned business executive. And I'm Jason Kelly, chief correspondent for Bloomberg Originals. Over the next couple months, we'll hear.
- [18:43]
Hannah
From all stars like Jay Williams.
- [18:44]
Katie Gaddy Tossan
I want to be an owner one day.
- [18:46]
Hannah
Billie Jean King, learn the business and so anymore listen to the deal on Spotify.
- [18:57]
Katie Gaddy Tossan
I have a follow up that has nothing to do with this specific question, but how long did it take you to figure out all of these factors and run all of the numbers?
- [19:04]
Hannah
Probably like an hour.
- [19:06]
Katie Gaddy Tossan
Oh, okay. This is very comprehensive. So very impressed.
- [19:10]
Hannah
Well, I guess we'll see if anyone says, katie, you're so wrong. And actually, here's a better model.
- [19:16]
Katie Gaddy Tossan
When the nerds come in, as she said, I know.
- [19:18]
Hannah
I kind of feel like the kid that would be like, would take the most roundabout way of solving the math problem. And then like, the really smart kid in the class would be like, you know, you can just do this. I'm like, oh, okay. Well, you know, we both got there. That's what matters. Okay, so to do this, I used an amortization calculator and I plugged in our 850k that we're borrowing in our 6% rate for 30 years fixed. And then I ripped the data into my own spreadsheet where I Had everything else kind of percolating and basically compared the amount that she still owed on the mortgage with the appreciating home value, assuming that it's going from 1,050,000 up by 5% per year, like, you know, routinely. And so if we assume that she's going to pay 3% when she sells, I think it's usually closer to 6. But with the changes to now you're stealing my thunder. I'm like, let's say she only sells because it's going to be a high value sale. Right. And so usually when houses are that expensive, you have a little bit more wiggle room with your negotiation. But I basically like subtracted out all of our different variables. So I projected into the future. I then looked at the post sale value after paying 3% to an agent. I then subtracted what she would still owe the bank on that mortgage. I then subtracted the $200,000 that her parents loaned her and then I accounted for the opportunity cost of the difference in her half of the monthly payment that could have been invested. So like the money that, you know what I mean, what that would have become in an investment account and kind of like net that out. And drum roll please. It does appear as though she would come out ahead pretty much immediately taking their offer.
- [21:02]
Katie Gaddy Tossan
Wow.
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Hannah
Absolutely shocked me. In fact, I'm so amazed by that outcome that I am about to double check all my math because I was like, wait, what?
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Katie Gaddy Tossan
Really?
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Hannah
Yeah. So she would be in the negative slash in the danger zone where like all the variables we didn't really talk about, like closing costs. Like that can be tens of thousands of dollars or like you have to replace the heating and cooling in the unit or whatever. Condos I think are also a little bit funky because I just remember talking to one gal who bought a condo in Dallas and within like a year something had broken the H Vac. But because of like where it was on the roof, she had to pay like a special company to come in. It was like a $20,000 ord. I'm defining that as like the danger zone where swings like that could kind of like tip you over. But yeah, man, I mean, she's like six figures ahead by year five.
- [21:55]
Katie Gaddy Tossan
Wow.
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Hannah
Assuming none of that goes wrong.
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Katie Gaddy Tossan
If I remember her original email correctly, she was like, this wouldn't happen for a year or two or we may relocate to the East Bay where things are a little bit cheaper. Considerably cheaper. So maybe she'd get more bang for her buck if she moves two miles east.
- [22:12]
Hannah
Yeah, I think if she did that, it would be pretty clear. So I mean year five, what I'm referring to is like the home theoretically going up by again 5% per year would be worth 1.2 million. She would still owe about 790k. The post sale value after the 3% would be discounted a little bit it looks like by about 40 grand. She pays the bank back, by then she's got 447k left over. Then she pays her parents back, she's got 247k. And then she's accounting for the opportunity cost of what that money could have done if it had been invested in the stock market, that differential. And by then she's down to like 187k ahead. But I'm like that's pretty significantly ahead.
- [22:57]
Katie Gaddy Tossan
Sure. But also there are a couple things that we didn't talk too much about like risks and watch outs which I know that you for sure, I know I saw your thunder before, I'll let you get to those. But the other one is just like The S&P 500 is up what, 20% right now. So mm, 6% is pretty conservative. But what are the other ones?
- [23:15]
Hannah
Yeah, so I think like in total, I would say that generally speaking I am pretty pro renting unless you know you are going to be in a place for a very, very long time. But in this case with that much down payment assistance with a roommate who is essentially footing half the bill for everything. Well for the monthly payments, obviously if you are assuming that you can charge them that which it sounds like it might be a little above market rent, so you might not be getting truly half, but you are effectively house hacking to some degree and you're in a traditionally strong market. Right. So all of these things taken together, barring any major downturns in her market or major maintenance issues, if you can stick around for 10 years, you could do quite well. Like at the 10 year mark, we're still talking about $500,000 in like net proceeds, factoring in paying back the bank, paying back your parents, discounting for opportunity cost. And you're already saving 35% for retirement. So this is not someone where I'm like, I don't know, you're kind of under contributing for your future. Like I maybe wouldn't go that route yet. We obviously have to see how much that would be reduced by. But her save rate is so strong that I'm like yeah, all of these things taken together, I think it, it makes sense. However, the biggest risk. Watch out. That I can see I think it's twofold, actually. One is a prolonged downturn. So she lives in San Francisco, which has done well, but actually did quite poorly in the 20 years prior to that. Like, Detroit had better appreciation than SF in the last couple decades of the 20th century. So things change. And we know she cannot afford this monthly payment on her own. She needs a partner or a roommate to afford it. There is very, very, very little room to downsize your earning when your monthly mortgage payment is six grand a month. So I'm not sure how much your partner makes, but to afford housing that costs $6,000 per month, they need to be collectively earning about $20,000 a month, which is $240,000 a year, like minimum.
- [25:26]
Katie Gaddy Tossan
So that makes sense to me because when I heard $6,100 a month, my heart dropped into my stomach.
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Hannah
Yeah, it's a lot. It's a very high monthly payment that you would be on the hook for.
- [25:35]
Katie Gaddy Tossan
But I feel like there are also some fringe details we want to be aware of. So one of the things that she had mentioned in her email was that the parents were still deciding if it's going to be a 0% loan or an equity stake because there were some potential tax implications. They said something about like a 4.2% tax from the IRS. I don't really know how that would pan out, but I guess she'd have to rerun the numbers and see if that still makes sense. Yeah, she said that unpaid balances will be accounted for in estate distributions should her parents pass away before she sells it. So effectively, she would get less if her parents unfortunately passed. And then in my opinion, it would leave her in a situation where she can't really expand her budget either too much unless her income vastly increases. Because like you said, if the partner's not there, she's going to have a hard time. If she decides to move to a lower paying job, she's kind of screwed. So that's the thing, the last thing that I would keep in mind. But if someone had, say, the wealth planner, would you recommend that they keep that loan at 0% under the debt section or in any net worth spreadsheet? So that.
- [26:37]
Hannah
Good question.
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Katie Gaddy Tossan
She remembers that it's there and it's like, even if she's not paying it back piecemeal, that's not really her money, so to speak.
- [26:43]
Hannah
Yeah, you're, you're so right, because she will, when she sells it, have to pay that money back. So it's better to discount your present net worth calculations by it now because in order to realize the gains on the asset section of the table, you by definition will have to realize that 200k deficit. So yes, I would definitely say tracking it that way makes the most sense.
- [27:06]
Katie Gaddy Tossan
As soon as you say present net.
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Hannah
Value, my brain went the present net value. Net present value.
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Katie Gaddy Tossan
Yeah, see, I didn't even say it right. Net present value.
- [27:16]
Hannah
Well, the joke is that I don't even know what that means. So what's notable to me though, for most people listening to this, who I don't know, you know what, this situation, now that we are entering like that great wealth transfer timeline, this may actually be more common than we realize. We're like, parents are willing to extend wealth in this way, but would not be willing to just like hand over a $200,000 check or are not willing to distribute it unless you're using it in this way. But I do think it's notable that if that 200,000 were hers and it were growing at a rate of 6% per year, she wouldn't even like break even until around year 10. As in like she would be in the hole, as opposed to renting and investing the difference, continuing to invest the difference until year 10, as opposed to being like half a million dollars ahead. So that opportunity cost of the down payment is an enormously powerful variable when you are trying to decide which path makes more financial sense.
- [28:24]
Katie Gaddy Tossan
Yeah, that makes sense. And I guess if you're trying not to buy a million dollar property, you would go even further, right?
- [28:29]
Hannah
Yeah. Yeah.
- [28:30]
Katie Gaddy Tossan
Well, speaking of homes.
- [28:32]
Hannah
Yeah.
- [28:32]
Katie Gaddy Tossan
I have a money story.
- [28:33]
Hannah
Let's go.
- [28:34]
Katie Gaddy Tossan
It's actually partially related to myself, so we'll see. But this rich girl Chansey wrote in about the NAR agreement. And so I want to just give some context as to what that's about before I, you know, read her full statement. But basically, if you are in the process of buying a home, you're probably aware of the national association of Realtors, the narrative. So over the summer you might have seen headlines. There was a settlement agreement that resolved claims that were brought on by home sellers regarding broker compensation. And so this officially went into effect of August 17th of this year. And they have a whole page on this on their website, which I'll link to in the show notes. But to kind of boil it down, when you had talked about seller costs in the past, buyers were not really expected to pay their real estate broker directly. So if I'm a buyer, which I currently am, and I have an agent and I want to go buy a house, I'm not usually paying that 3% fee or whatever that fee is. And that's because those commission fees to both the buyer's agent and the seller's agent were paid by the home seller. And so those commissions are usually about 5 or 6% of a home selling price. So for example, if you're, if you have 450k home, which is I believe, the average price of a home in the United States right now, a seller would be your multiple for $27,000 in fees. And that would be split between the two.
- [29:50]
Hannah
Yeah.
- [29:50]
Katie Gaddy Tossan
Now experts have said that this commission kind of is baked into the home listing price and then kind of inflates the home price to begin with. But beginning that week in August, the TLDR is that you now must have, it's two parts. You must have a written buyer agreement that meets certain criteria about how an agent will be compensated. So if you were trying to work with like several agents, which some of our friends have mentioned doing, you can't really do that anymore because you're going to be on the hook with your exclusive agent. And as part of that disclosure, you're going to have a very specific clause of that amount or rate of compensation and how it's going to be determined. And it can be, it has to be objective. It can't be open ended. It can't be like buyer broker compensation shall be whatever the amount is, it's going to be like it's either $0 x percent, x hourly rate x flat fee.
- [30:38]
Hannah
Oh, because there's no longer like a, it's no longer in these contracts as a default that the seller has to pay them 3%. So now they have to come to you to get paid for their work.
- [30:51]
Katie Gaddy Tossan
Exactly. And so the second part of this is that the offer of compensation, so when a seller or seller's agent shares that compensation with a buyer's agent, it can't be shared anymore on the mls, which is like your multiple listing services for your area where they put all the homes. And so what some agents in the past used to do is they used to filter out homes that were for sale that were like 3% commission so that they weren't wasting their time on anything that was less. And then people were like, that's not really fair. So now any offer of compensation is not shared on there. So the seller can still offer, they can still make that offer available, but it has to be communicated off of the mls. So this brings me to Chancey Story and my own. So Chansey said, listen up home buyers, you need to negotiate for lower fees with your agents. Most don't even realize they need to do this because the buyer's agents are still telling buyers they don't need to worry because sellers typically pay the fee. My husband and I are currently relocating from Colorado. Sad face. To New Mexico. So we're going through the buying and selling process. New Mexico requires you to sign a brokerage agreement before any agent can show you a house, which is the same that I just mentioned is like a new addition. And I was aware of the NAR agreement, but I didn't really understand what it meant for us as it's new. So we signed a buyer agreement at 3%, but we should have negotiated, especially because the price point of homes we're looking at is still a great deal for an agent at 2 1/2 percent. It turns out that the seller of the home we're now under contract with negotiated 5% split between the agents. So now we are on the hook for that additional 0.5%.
- [32:22]
Hannah
Oh, wait. So the seller can negotiate on your behalf and then you're on the hook to pay whatever they negotiate?
- [32:29]
Katie Gaddy Tossan
She said. I am now meeting with my selling agents to list my home in Colorado. And when I asked what their fee was, they instantly came down from the old 6% norm that was split between agents before I even tried negotiating it. So it sounds like the seller is offering to cover the two and a half percent, and that's the max that she's negotiated for with her side of the story. And so for them, if they've negotiated 3% for their buyer, their buyer's agent, then they have to pay that extra 0.5%.
- [32:55]
Hannah
Oh, they're just paying the differential.
- [32:57]
Katie Gaddy Tossan
Yes.
- [32:58]
Hannah
Oh. So the seller who negotiated 5% or whatever is like they're going to be on the hook for two and a half. But because the buyer agreed that they would get three, they now foot the bill for the. Okay, now I'm tracking. Wow. Okay. Well, these are those interesting little pieces. A fallout from that court's decision that, like, it's. I feel like people just don't know. I don't. I didn't know.
- [33:20]
Katie Gaddy Tossan
The argument from the court is that this is actually making things more transparent for buyers because it gives them the opportunity of choice and like to decide and that they can negotiate, which is what. What people didn't feel like they could do before. But. So I'm in a similar boat because I'm house hunting as well. If you're in Atlanta or Decatur, hit me up. Because your girl doesn't know what she's doing. But when I met a realtor, I did have to sign an exclusivity agreement with them, which when we talked to previous realtors, it wasn't an issue because it was before this August 17th date. So as soon as that kind of hit, she was like, no, you got to do this. And then when we were talking through that commission, she was upfront like, hey, these things are negotiable now, blah, blah, blah, 3% is a standard and blah, blah. So we just, I think we just signed for the 3%. I didn't even know that you could negotiate down to 2.5 until I read this Rich girl roundup, which is why I think it's important that we share it with you guys if you are in the same boat. Because now I could be in a similar situation if I go to buy a house and I'd be on the hook for that half percent.
- [34:17]
Hannah
The exclusivity agreement thing seems so wonk to me though, because what if you're working with someone and you sign an agreement and then they just like fall off and they suck.
- [34:28]
Katie Gaddy Tossan
There's parameters on their end that they have to agree to as well of like timely service and blah, blah, blah. You can break the agreement under circumstances.
- [34:35]
Hannah
Yeah, I'm like, how binding are those?
- [34:37]
Katie Gaddy Tossan
They're pretty reasonable. But obviously you are on the hook. And so if you find your own home and you do most of the legwork as chance, you know, Chansey's saying, like, my seller, we did it all. Yeah, we did it all. Then you're just paying, you know, an extra 5 or $10,000 for.
- [34:52]
Hannah
Oh my God.
- [34:53]
Katie Gaddy Tossan
They didn't really do much.
- [34:54]
Hannah
That would drive me nuts. Well, when we're moving to Denver in the spring, we had chatted with a couple agents just to be like, we don't know if we want to rent or buy. Maybe you can help us find, you know, weigh our options, find stuff for us on rental and buyers markets, whatever. And no one was trying to get me to sign shit. So I'm like, I think these people can tell that I am extremely non committal and they're not even going to waste their time trying to get me to sign something.
- [35:18]
Katie Gaddy Tossan
It applies even if you just want to tour a home wild, obviously you can go to an open house and you don't have to sign to like enter an open house. But if you reach out to an agent, you're like, hey, I want to go tour this. You have to sign. And it was something that My realtor disclosed, like, she was like, I can't actually show you this one home that you're interested in until you sign that agreement for me. Because that's, like, the legal ramification now of. Of this larger nar follow.
- [35:41]
Hannah
You know what's interesting, though? I mean, not to be shady, but, like, I would feel pretty comfortable, I think, just showing myself the houses. Like, if I know where I'm trying to go and there's an open house, I feel like I could go and check it out on my own without really needing someone to, quote, show it to me. Like, if the owner is there and their agent is there. You know what I mean? So what is the benefit then of, like, having someone who's taking, quote, unquote, taking you there to show it to you?
- [36:09]
Katie Gaddy Tossan
So a couple things have popped up for us. One was we got in before it was even on the market because our realtor was able to communicate to their realtor and say, like, hey, we have a couple that's really interested, blah, blah, blah. Okay, so that was nice. It's not really something you can easily do for yourself.
- [36:22]
Hannah
That's a benefit for sure.
- [36:23]
Katie Gaddy Tossan
Two, they're able to also communicate with that realtor to ask questions like, like, do we think that they'd be flexible on these sorts of things? Or, like, what's their timeline? I'm moving, like, they just have more connections to that realtor. I personally have never tried to get in touch with someone else's realtor to ask these questions. And three, like, there are realtors that will be really honest with you about.
- [36:43]
Hannah
Like, I wouldn't buy this because, yeah.
- [36:46]
Katie Gaddy Tossan
Like, they can't say certain things. There's, like, a code of ethics that they have to follow, so they can't say things about, like, the school system.
- [36:51]
Hannah
Or whatever that backsplash is fugly.
- [36:56]
Katie Gaddy Tossan
But I do think that there are certain things that they kind of. Like, if you read between the lines kind of thing, or just like, for example, I remember there. One of the things that I said is, like, I really don't like that LVP flooring. That's, like, dark gray. You know what? The flooring I'm talking about grayish.
- [37:10]
Hannah
Millennial grayish.
- [37:11]
Katie Gaddy Tossan
And I was like, I'd really prefer hardwood. And so we, like, went to some open houses. And she was like, oh, there's definitely, like, hardwood underneath all of this other stuff. Like, like, stuff that they know about houses that I just wouldn't know. Or they were like, yeah, I can see that the outlet in this place is Great. Because it connects to this, and that's really useful right here. And I'm like, I wouldn't know that. I've never.
- [37:31]
Hannah
You could fit a full bouncy castle in this backyard. And have you considered that?
- [37:35]
Katie Gaddy Tossan
I mean, that would be one of the first things I'd do for my dog.
- [37:38]
Hannah
This is making sense. Okay. All right, I'm with it. I will say that there are interesting subreddits where people will talk about how like it, give it people advice on how to list. On the seller side, how to list your own home and be your own agent and, like, save the 5% or whatever. So I know that there are some people who, like, take that as a challenge of, like, I'm going to do this on my own and save the money. I personally, to use remit language, one of my money dials is convenience. So I think I would probably be willing. Like, I'd be working with the pro, but that information is out there.
- [38:11]
Katie Gaddy Tossan
I think I would do it if I was, like, an established homeowner. Like, I don't feel like I know enough about a house to, like, list it and be, like, really confident in that listing.
- [38:21]
Hannah
Well, you got to get the house first.
- [38:23]
Katie Gaddy Tossan
Well, yeah, I got some time, but I mean, I've heard from as a.
- [38:28]
Hannah
Non homeowner, I can't see myself listing. I feel you. I feel you. You're like, I've never done it before. I don't know what to expect. I've never been through the process.
- [38:36]
Katie Gaddy Tossan
Yeah, but like, people who are like, oh, I already found the house on my own, blah, blah, blah. And I'm like, well, I understand why you wouldn't want to pay the 3%, but it's like, if you're realtor also, like, fought for you to get concessions or got the closing costs cut down or whatever. Like, I just feel like those are things that I can't necessarily negotiate for myself, because I am baby. And if they're like, no. I'm like, okay, so sorry for asking. My bad. So.
- [39:01]
Hannah
Oh, man. Okay, wait. Before we go, I do have a funny related story to that of being conflict averse, because I was talking to Thomas about this the other night. He was telling me that I'm a mark when it comes to. He's like, anyone's, you know, got a booth and they're trying to talk to you about something. Someone's knocking on the door asking for a donation. Like, there is someone on a bike who. Who has a Bible they want to give you. He's like, you are a mark. Like, you will stand there and listen to anybody, and you're way too nice, and you're always giving people. So I go, yeah, Thomas. But that's because I feel badly. Like, I feel bad that, like, they're asking for my. Like, I feel like I feel obligated to give it to them.
- [39:41]
Katie Gaddy Tossan
Why do you feel like.
- [39:43]
Hannah
He goes, why? He was like, they should feel bad. They're the ones imposing on you. And I was like, that's so true. They are imposing on me. They are asking for my time. Why do I feel obligated to give it to them? And so it was just interesting because he was like, yeah, I never feel obligated. I don't feel bad if I say no when someone asks me for my time, I'm like, no, Good luck, but not interested. And I was like, that feels kind of. To our conversations about being afraid of conflict or, like, being a people pleaser or wanting to negotiate against yourself, I can't help but notice that it feels a little gendered that I feel like growing up, I was always told, like, to be a nice girl, to be a good girl. You should be very accommodating. You make everyone feel comfortable.
- [40:24]
Katie Gaddy Tossan
Yeah.
- [40:24]
Hannah
You just want to be a good girl. Right. And part of being a good woman is being giving and being selfless and giving anyone anything they need from you. And so I am trying. I'm working on being just a little bit more of a.
- [40:39]
Katie Gaddy Tossan
Just a little. She said, have you considered being a. We'll bleep that out.
- [40:45]
Hannah
Bleep that.
- [40:47]
Katie Gaddy Tossan
Have you ever done the exercise where you walk down the street and you don't move out of the way when men walk on the sidewalk?
- [40:52]
Hannah
Mm. Mm. Brilliant. I would. I have hives just thinking about it.
- [40:55]
Katie Gaddy Tossan
You'll realize how often you'll, like, you'll just move, and the man never moves. And I have started doing. And I started doing it when I worked in the city, and I was like, oh, this is all of the time, dude.
- [41:05]
Hannah
So it was so funny because we were having that conversation on a walk, and I was like, yeah, you're right. I don't owe people my time just because they ask for it. They are imposing on me. I deserve to be. I'm in control of my time, literally. Hannah. We turn the corner, and two missionaries on bikes ride by, and they go, can we tell you about Jesus? And I looked at him, and I turn to them and I go, no, thank you.
- [41:28]
Katie Gaddy Tossan
It was a test.
- [41:29]
Hannah
I was like, whoa. That was a test.
- [41:31]
Katie Gaddy Tossan
Why do you have so many missionaries on bikes. I've never heard of this before.
- [41:35]
Hannah
Yo, it's central. It's the desert of California. Everyone thinks, never heard of California is where all the liberals live. No, dude, that's just coast.
- [41:44]
Katie Gaddy Tossan
Yeah. Just imagining you being like, no, no, thank you.
- [41:47]
Hannah
I know. I was like, no, thanks, but good luck. And also, you look really pretty, and I'm rooting for you.
- [41:53]
Katie Gaddy Tossan
Well, I think the other thing too is, like, I'm not saying that we are well known, but I think there's this, like, feeling of, like, if someone sees me and I'm not super nice to them and then they put two and two together that I am X person. You know what I mean?
- [42:09]
Hannah
Well, I'm many famous in the niche of personal finance. People are going to hear this voice and they're going to know. They're going to know.
- [42:16]
Katie Gaddy Tossan
Well, as I told you, last weekend, I was in a wedding, and the guy that I was paired up with to walk down the aisle with, he was like, oh, what do you do? I said, I'm in personal finance. We have this blog and a podcast, whatever. And I said, it's under Morning Brew. And he said, morning Brew. Oh, I listen to the podcast. I really like that blonde money lady. And I was like, that's us hoarding for duty.
- [42:36]
Hannah
It's funny because I think people will, like, with the chapel roan discourse, people will always be like, I feel like that's a thing where I'm like, well, you don't want to be reckoned. I'm like, I fucking love it when people recognize when people come up to me and they're like, I love your show. I'm like, oh, my God, tell me more.
- [42:50]
Katie Gaddy Tossan
Remember when I said that at the airport and you told me to shut the f up and.
- [42:54]
Hannah
No, what are you talking about?
- [42:55]
Katie Gaddy Tossan
Yeah, we got dropped off the airport, if you remember, we're waiting for Giovanni. And then I was like, oh, my God, Money with Katie.
- [43:01]
Hannah
You were faking it. You weren't. I'm saying when real people come up to me and they go, oh, I love your show. Or like, there was a United flight attendant once that when she was like, what would you like to drink? And also, I love your podcast. And I was, like, beaming for the rest of the flight. So I absolutely love the attention. As a matter of fact, I got into podcasting because I love attention.
- [43:22]
Katie Gaddy Tossan
That's true.
- [43:23]
Hannah
So to withhold the attention from me is actually cruel and unusual, but not if you're selling Bibles or you have a booth and you want a signature. Okay, that's all for this week's Rich Girl Roundup, and we will see you on Wednesday to talk about the 2025 wealth planner and what it takes to calculate a truly comprehensive financial independence timeline. And, yes, that includes using some of your investments for a down payment.