"I'll Pay For Your Appraisal" From a Loan Provider

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This is one of those commercial gambits I keep seeing that has nothing intrinsically wrong with it, and yet it is most often a tactic employed by the more costly loan providers. In short, sharks and scam artists.



The basic come-on is this: Loan provider offers to pay for your appraisal if you do the loan with them. They often use such come ons as "free appraisal!"



TANSTAAFL. Repeat after me. TANSTAAFL. There Ain't No Such Thing As A Free Lunch. "Free" stuff has an ugly habit of being the most expensive there is, and this particular come-on is no exception. Offer you a few hundred with the left hand while picking multiple thousands out of your pocket with the right. If you want to be an educated consumer, engrave TANSTAAFL upon your soul.



What's going on here is that they are trying to make it look like you're getting something free. You're not. They may front the cash for the appraisal, but in all but a few cases you're going to get explicitly charged in the end. Even for those people whose final loan papers does not show an appraisal charge, they are charging it to you somewhere else. Odds are that they're charging it about ten times over somewhere else. Either in origination or yield spread, one way or another you are going to pay for this appraisal. Actually, you are likely going to pay for that appraisal several times over. People are strange about cash. Many folks, if told they don't have to lay out $300 to $500 for an appraisal, will choose loan providers where the proposed rate is 1/4 to one half a percent (or more!) higher than competing loans, with closing costs thousands of dollars higher. They are getting the cost of that appraisal all right. In this scenario, they're making half a point to one point more than anyone else on the same loan, plus all of the extra closing costs. That's if they're a broker. If they're a direct lender, the difference is between a point and a half and two and a half points, more if there's a prepayment penalty!



Low cost loan providers do not pay for your appraisal. The loan providers who pay for the appraisal are paying not only for your appraisal, but the appraisal of all the people who cancel, and a good margin besides. Not to mention that this loan provider completely controls the appraisal, leaving them in control of what happens if you actually notice their huge fees when you go to sign loan documents, and decide you want to go somewhere else. This is one of the ways that loan providers avoid competing on price, by pretending to give you something for free. I say "pretend" because they are not giving you anything for free. I do not understand that normally competent adults who are well aware what "free" really means in other contexts will think it means they're getting a benefit. But just like the "buy one, get one free" offers that jack the price up threefold first, this is only a good bargain if the few hundred dollars it saves you stays saved, rather than giving you $400 with one hand while taking $6000 with the other, through higher loan rates and costs. Rate and cost trade-offs on real estate loans vary constantly. You can't know what the best bargain is right now unless you price it out right now.



Caveat Emptor.



UPDATED here

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3 Comments

Iamthereforeithink said:

just a quick comment on the "free appraisal" topic. In a market like the one we are in today, no gamble comes without a price. When a lender offers to cover the free appraisal - if the appraisal comes in short, (in most cases) there is no more deal and the lender has lost anywhere from $300 to $750 on the cost for the appraisal. Much better from the clients perspective now isn't it? How many clients are willing to place that amount of money on the table and let it ride? Some lenders will.



DM: and to pay for those appraisals, the lender charges those who do go through with the loan a much higher margin. Are you playing around, or really shopping for the best loan? If you're playing around and don't want a mortgage, by all means go where you won't have to pay. If you want a good mortgage, it takes a certain amount of money, and if you face this in the first place, you'll come out with a better deal. I have seen the difference be well over a full point many times - and on the $400,000 property around here, keeping that $400 in your pocket just cost you $4000. Doesn't that make you feel great?

Iamthereforeithink said:

Great point! ( As in your advice - not the lenders charge). To the unrushed consumer (ie. those who have time to shop around and have time to play games), would you suggest using this free appraisal if numbers were tight as a means to see what their homes true value is? ...and once value is confirmed and deemed usable, then proceed to shop with other lenders for better pricing?

Dan Melson said:

It's a waste of your escrow time and contingency time within escrow. They're not going to do it if you don't have a fully negotiated purchase contract, and once you do have a contract, that clock is ticking. CAR Default is a 17 day loan contingency - and most purchases have an appraisal contingency as well. Delaying applying for the loan you really want to perhaps save the appraisal fee isn't a good bet of your limited transaction time. Better to find an appraiser with their head on straight who'll give you a heads up that the comps don't support necessary value before he comes out and charges you the fee. I've got appraisers who will do this, because they'll still get the appraisal if I can save the transaction, and they'll also get future orders, because them doing this makes it orders of magnitude easier to save the transaction.



See my Article on the Appraisal http://www.searchlightcrusade.net/posts/1125496859.shtml

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This page contains a single entry by Dan Melson published on August 8, 2006 10:00 AM.

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