Builder's Incentives To Use Their Lender
One of the things I'm seeing more of in MLS listings and developer advertising, among other places, is the phrase "$X in closing cost credit (or "$X in free builder upgrades" given for using preferred lender"
Sounds like a bargain, right? Just use their lender and you get this multi-thousand dollar credit. After all, "All Mortgage Money Comes From The Same Place!" Free money, right?
Well possibly, but not very likely. What most companies are looking to do with this advertising is give people a reason not to shop around. They hope that because most people think that "All Mortgage Money Comes From The Same Place", the average customer will just stay there to apply for a loan. Many builders and conversion companies will throw roadblocks in your way if you try to use another lender. They cannot legally require you to use their loan company (at least not in California), but they can make it exceedingly difficult to go elsewhere. I've been told by builder's representatives on two occasions that I was wasting my time with a loan, because "If they don't use our lender, they won't get the property!" despite already having a signed purchase agreement. Roadblocks take all sorts of turns. They won't let the appraiser in. They won't cooperate with requests for information, without which the other loan is going nowhere. And so on and so forth.
The builders wouldn't give those incentives to use their lender, or throw roadblocks in your way when they're trying to sell you a property, if they weren't making more money with the loan. Quite often, they're making more money on the loan than they are from the sale. Put you into a loan half a percent above market, stick a three year prepayment penalty on it, and voila, anywhere from a 6 percent premium to perhaps 10 percent. To give you a comparison, around here an average brokerage makes 2.5 to 3 percent from a transaction, and industry average loan compensation is just over two percent. But the average consumer is distracted by these "free" upgrades or closing costs that they don't realize how badly they've been raked over the coals. If I can get you that $400,000 loan half a percent cheaper and with no prepayment penalty, I'm saving you $2000 per year for certain, and very likely about $12,000 on the prepayment penalty.
Furthermore, on some of the builder's loans I've analyzed, they're getting you a rate that would carry a point and a half retail rebate, even without the prepayment penalty. This means on a $400,000 loan at that rate, the lender would be paying you a $6000 incentive to do that loan, more than covering normal closing costs and a broker's normal margin. Have no fear, that builder is doing quite well for having loaned you that money. But that's okay, because it was "free", right?
What can an average person do about this sort of thing? As I've said before, builders often throw roadblocks in the way of outside lenders, and there's not a lot that you or anyone else can do about this fact.
The thing to keep in mind is to shop your loan, and to choose your loan based upon the bottom line to you. There is always a tradeoff between rate and cost, but the provider who can get you the loan a quarter percent cheaper for the same cost or at the same rate for $2000 less cost is the one you want.
Many people want brand new homes if they can get them. Given the realities about Mello-Roos and how prevalent homeowner's associations are in more recent developments, I'm not certain I understand this. It's one thing to deal with Mrs. Grundy when you're all cheek by jowl in a condominium high rise. It quite another thing to deal with her complaints because you left your garage door open ten minutes longer than the rules say, you want to paint your detached home a couple shades darker or lighter than everyone else, or whatever's got her dander up today.
I do have a trick or two up my sleeve for when I'm a buyer's agent in new developments. It's my job to outmanouever the selling agents the builder has on staff (who tend to be heavy hitting salesfolk). But they are dependent on some things that change from transaction to transaction, so I can't really describe them in any kind of universal terms. Writing an offer contingent upon an outside loan is good but has its limits. Builders who throw roadblocks have that one wired; they wait for the contingency to expire at which point they've either got your deposit or your loan business as you are so desperate not to lose your deposit you'll do almost anything, particularly since most folks don't understand how much that loan is really likely to cost them. But if you want the property, you can be forced to give in to these demands, which on a $500,000 property effectively add anywhere from $20,000 to $40,000, and possibly more, to the purchase price - an addition that most new development buyers would do well to consider in their computations of whether to buy in that development at all.
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My friend went to a builder and trusted the onsight sales person. Not good. Now, she's got all this paperwork which in itself is very confusing, stating that if she doesn't her their lender (they own 100% stock of the lender, too) that they (builder) won't pay the incentives toward her closing costs. I don't know how to get to the orginal agreed sales price to compare apples to apples. There's also a disclosure stating they were adding $5000 to the sales price for the $5000 closing costs the seller agrees to pay? The Selection Sheet is so confusing, my friend doesn't know what's included and what's not?
Why isn't this illegal/breaking RESPA for them to offer "incentives by the seller" only if the buyer uses the sellers lender?
I told her she should have her own agent who could watch out for her, but she's a little naive. She actually had a friend of hers show her some properties prior to this builder house, but someone told her about the addition and she went and looked on her own. Now, I'm afraid it may be too late to come back and bring her realtor. She's paid either $500 or $1000 earnest money deoposit. She actually trusts people.