Don’t Get Taken to the Cleaners by Builders, Their Lenders

Many builders tie their incentives to the use of the builder’s lender and title company. On the outside, you may think it’s no big deal. The builder just wants to make a few extra bucks on the back-end while you get tens of thousands off of the price of the home.

But let’s dig deeper…

Let’s say you’re looking around for resale (non-new construction) single-family homes and you really like a few homes you saw in the $600K to $650K range. But, after speaking with your lender and seeing how they crunched the numbers, you see that the top end of your approval amount and comfort price range is $550K (based on a 30-year fixed-rate mortgage at 4.75 percent at 1 point).

What do you do?

You adjust your search to properties priced no more than $550K and continue your search. Once you find a property you like, your agent does a market analysis and determines that the property is over-priced by $40K. Despite you really wanting the property, there’s no way you’re going to overpay for a property so you either offer them less or keep on looking for other properties.

Now let’s say that you fall in love with a new construction single-family home priced at $650K.

You contact the builder’s lender, fill out and application and let them crunch their numbers. As the lender crunches the number, they come to the same conclusion – you’re really only approved up to $550K.

But the lender knows that the builder doesn’t have any lower priced single-family homes available. If the lender tells you that you can’t afford to buy that house, you may go to another community and another builder. If the other builder’s lender somehow finds a way to approve you up to $650K, you may buy a single family home in the other builder’s community. That means the builder and the builder’s lender will lose a home sale AND the money from your loan AND the money you’ll pay the builder’s title company at closing.

What does the lender do?

Many times, they find a way to get you approved up to $650K – even if that means that it’s not in your best interest.

Here’s how the two scenarios differ:

In the first scenario, your interests are being looked out for by various people, none of whom are anxious for you to buy any specific property. You don’t get stuck in a loan you can’t afford to pay and you don’t overpay for a home.

In the second scenario, no one is looking out for your best interests. The builder, the builder’s lender and the title company are all tied together and looking out for each other’s best interest and pocket book – not yours. They want to make a sale and get you to pay the most possible for the home. It would be a conflict of interest for the builder to look out for your best interests because it would mean that their sales and profits would go down.

(And do you think that the builder’s sales rep/manager is going to tell you that the home is overpriced? HA! Yeah, right…)

Moral of the story…

Make sure you understand that builders, their sales rep/manager, their affiliated lender and title company are only looking out for one thing – their own best interests. They’re not there to make sure you don’t get in over your head nor that you get a good deal. If you don’t believe me, check out this real life example.

Slightly off-topic, but very relevant…

This is why the current battle by HUD to pass new RESPA laws banning builders from tying incentives to the use of their affiliated lenders needs to be won by HUD. The new law was passed and was supposed to go into effect on January 16, but its been put on hold, probably because of the law suit by the National Association of Home Builders (NAHB) who knows that it would cut into their bottom line regardless of the good it would do home buyers.

Update on New Construction in Van Metre Stone Ridge Community

 

Here' an update on what new construction and spec homes are available in Van Metre Homes' Stone Ridge community located off of Route 50 in Loudoun County:

Stone Ridge – Single family homes
 
Van Metre has 5 home sites available for the Hickory model (which is part of the Savannah Collection). In addition, they have one spec Hickory model available.
 
All 5 of the "to-be-built" home sites and the spec home are 20% off. The base prices for the "to-be-built" Hickory models are $475K. The spec home is pretty loaded and, with the 20% off, is $438K.

Van Metre has one Brighton spec home available. It's loaded with options including a finished basement, full bath an 2 bedrooms giving it a total of 7 bedrooms and 4.5 bathrooms.
 
They have a total of 50 single family home sites left in the community, but they don't anticipate many of those lots having any more Hickory models on them, just the other series, which the Brighton is a part of.
 
Stone Ridge – Town homes
 
Van Metre has 4 Erickson (interior model, 2900 square feet) specs available. With all incentives, they price out between $358K and $389K (prices vary due to options chosen). Delivery dates are all in February.
 
They have several of the smaller town homes (2400-2500 sq ft) available. They are "to-be-built" and with all incentives come out to a base price of $340-$370K. New buildings have been released and offer pond views (covered bridge, fountain, landscaped). Delivery dates on "from dirt" town homes range from April/May to June/July.
 
Note: $10K of the incentives on the single family homes and $5K of the incentives on the town homes are tied to using Intercoastal Mortgage and the builder's title company of choice.

If you'd like more information about Van Metre, Stone Ridge, available lots and models or want to visit the community in person, contact me – danilo.bogdanovic (at) gmail (dot) com – 703.582.6900.

Should You Look at Assessed Value When Determining Market Value?

There was a great two-part question posed by a reader, Dave, that I wanted to to share with everyone – "How does this new assessment affect the sale price of the houses in the market. As a buyer, should I look these assessment values?"

Buyers using assessed values to determine market value, offering price, etc…

The answer to that part of the question is "no" – assessed values should not be used by buyers (nor sellers) as the "end-all-be-all" determination of a property's market value or offering price. The assessed value of a property can be used by a buyer as one data-point to get a very general idea of what the value may be or how much it's changed since last year, but that's about it (more on this later in the post).

The reason why is because the process by which the assessor's office comes up with assessed values is automated and not specific enough to come up with an accurate market value of any one specific property. It's basically a computer program that uses public data such as tax records - that data is often flawed, incomplete, inaccurate or all of the above.

And, as the Loudoun Assessor mentioned during his presentation on the assessment appeal process last week, the county's appraisers only drive by no more than 25 percent of all properties in Loudoun and they don't go inside any of them unless asked to by the homeowner (usually for assessment appeal purposes).

This process leaves a lot of room for error.

Assessed values don't take into account things such as the types of interior upgrades (e.g. granite, tile, hardwood, paint scheme, carpet type, condition of the property, etc) nor exterior features (e.g.  lot type, what the house backs to, new siding, new roof, stone, brick, etc).

When accurately determining a property's market value, all of these and many other things must be taken into consideration. In addition, the property must be compared to recent similar sales along with a determination of how the current market conditions and competition will affect the value and sales price of the property on that specific day.

A buyer could use assessed values to get a very general idea of whether the asking price is even in the ball-park of fair market value based on the percentage of which similar homes are selling for as compared to their assessed value, but a more accurate determination of the market value (as described above) must be done to pin-point the fair market value of that particular property at that particular moment in time.

Assessed values affecting sales prices…

As far as assessed values affecting sales prices, they don't directly affect them for many of the reasons mentioned above along with what I'm about to point out… 

Note: Assessed values are supposed to be the Loudoun Assessor's opinion of the fair market value of the property on, and only on January 1. That means that the assessed value is not considered a property's fair market value the other 364 days of the year, even by the Loudoun Assessor's office.

And you shouldn't either - market conditions and values change all the time. For example, was your property worth the same December 1, 2008 as it was January 1, 2008? (Every homeowner and seller wishes it was…)

Thanks Dave for commenting and for asking the questions. Please keep them coming…

The FDIC Ain’t Got Nothing on the Mob!

While the FDIC struggles to keep money in the reserves in order to insure bank customers' deposits…

 

Who's word on insurance would you rather take right now?

Loudoun Assessor Speaks About 2009 Assessment Appeal Process

The Loudoun County Assessor, Todd Kaufman, spoke about the 2009 assessment appeal process today at the Dulles Association of Realtors office in Leesburg, VA. The packed "Lunch and Learn" event was catered by Charles Fincher of Monarch Title (thank you Charles).

Here are some of the highlights I took from the presentation:

• Bank-owned properties and short-sales are "not considered" when coming up with assessed values yet, they "are sometimes" – ?!
• The appeal process is meant to "not be adversarial"
• The Loudoun Assessor's Office "welcomes more information about properties in order to get the assessed values correct"
• The Assessor's Office only has 18 appraisers that have to assess all 115,000 properties in Loudoun
• The assessor uses public data to determine assessed values (automated process)
• The goal of the Loudoun Assessor's office is to physically review 25 percent of all properties in Loudoun, but that does not mean going into the property – only seeing it from the outside.
• If you win your appeal with the Board of Equalization (BOE) and your assessment goes down, Loudoun County may take you, the property owner, to court to fight the BOE's ruling. The BOE is out of the loop, but the property owner is now on the hook and takes the heat for the BOE's ruling
• Loudoun Assessor says that his office never has nor ever will refuse to look inside of a property if asked to do so. Only home owners have refused to let Assessor's Office in 
• The online Application for Review Form has come a long way – it's much more user friendly and auto-populates once you enter your property PIN into the form

And here are the five steps to appealing your Loudoun assessment…

1. Review notice of assessment via snail mail or online. The notice will include schedule/steps regarding appeal process
2. Submit an Application for Review Form postmarked no later than March 6 (you can also complete it online). Important: If you choose to appeal the assessed value based on market value, you must have the details of three comparable properties and an opinion of true market value ready to submit along with the Application for Review Form (contact me if you need a list of comparable properties and/or a determination of market value for your property)
3. Written request for consideration on current assessment or previous assessments (up to 3 years) based on an erroneous error
4. Formal appeal to Board of Equalization (BOE). Postmark deadline for appeal consideration by BOE is June 1
5. Formal petition of appeal through Court system

Further Details

The Review Process

• Goal is to provide convenient and uniform review process allowing informal discussions regarding assessments
• Petitioners must address concerns regarding property value and provide empirical evidence why assessment may be incorrect. Burden of proof legally on property owner. Assessment deemed correct unless petitioner illustrates otherwise
• Appeals documented become part of assessement record (aka what you tell the assessor's office becomes public data). Automated Application for Review Form provides non-adversarial platform for public to communicate assessment concerns
• Property owners encouraged to discuss concerns with staff prior to filing formal appeal through BOE or courts

Reconsideration of a Prior Assessment

• Property owner requests correction to property record which may impact assessment for current and prior years
• Example: garage demolished or added several years earlier. May not have been recorded because property owner did apply for permit. Property owner can seek relief from Assessor to correct current assessment and up to three years prior assessments.
• Relief granted if sufficient evidence formally provided in writing substantiating need for change in the assessment

Board of Equalization

• Opportunity to appeal to a local, independent group that may adjust value (current year only)
• BOE has 5 member, court appointed citizens panel. Consider equity and market value. BOE prohibited from making erroneous changes without support or evidence
• Petitioner must provide evidence establishing that assessment is incorrect based on comparable sales or by establishing inequity. Application for appeal must be in writing
• Properties can be adjusted by BOE if error disclosed, even if property owner did not appeal assessment

Court

• Last element in appeal process
• Adversarial process which typically requires petitioner to hire an independent fee appraiser and legal counsel
• Formal appeals such as these are expensive and time consuming for both the property owner and the County

Loudoun New Construction Home Buyer Learns Hard, Expensive Lesson

A Loudoun County home buyer recently got screwed over by a new home builder and I thought I'd share the story in hopes that others would read this post and not let it happen to them. (Ive left out the name of the buyer, builder and lender)

A Loudoun County home buyer decides to buy a new construction home in the area. They narrow down the search to a particular community, builder, lot and model.

The buyer sits down with the builder's sales manager and figures out what the total cost of the home would be including all options minus the builder's current incentives. (For the sake of this post, we'll say the total cost including all incentives is $850K).

The builder's rep makes it clear that $150K of those incentives is tied to using the builder's lender and title company. The buyer is reassured that the builder's lender and title company are very competitive when it comes to rates, closing costs and fees.

The buyer completes the application and the builder's lender comes back the next day and says, "No problem! You're approved up to $900K. You can either stay at $850K or add some more options if you'd like."

The buyer is glad to hear the news of the approval, signs a purchase contract with the builder and puts down a $45K Earnest Money Deposit (non-refundable after the 3 day review of the HOA docs).

About 2 weeks later…

The buyer runs into a friend of a friend at a local bar during happy hour. The buyer finds out that their friend's buddy is a Realtor and happily tells them the story of how they bought a new construction home all by themselves (without a Realtor) and how they got $150K off of the price.

They also told them how happy they were that they got a great interest rate from builder's lender and how easy the approval process was. In fact, they barely had to turn in any paperwork to get approved.

When the buyer tells the agent which community, which builder and which model they bought, the Realtor tells them they paid between $50K and $100K too much for the home based on what others had negotiated for the same model from the same builder less than a month ago and what comparable 1-year old resales were going for in the same community.

The Realtor also tells them that they may have gotten screwed on the interest rate and that they should get a second opinion. The Realtor suggests that the buyer call a reputable, honest and experienced loan officer not tied to the builder in order to compare deals.

The buyer's friend vouches for the Realtor and the Realtor sounds like he knows what he's talking about so the buyer takes their advice, contacts one of the recommended loan officers an submits and application online.

After evaluating the buyer's credit and financial situation, the loan officer quotes the buyer a rate that is 1 percent lower and with .5 less points than the builder's lender…and only approves the buyer up to $750K, not $850K like the builder's lender did.

The buyer is shocked and insulted and tells the lender that they must have made a mistake. How could they be approved for $100K less and the rate and points vary so greatly?!

The loan officer explains that numbers and ratios can be manipulated to make it appear that a buyer can afford more than they really can. They also explain that the builder's lender is affiliated with the builder and may have only the builder's interests in mind, which is to get a buyer to buy the home.

The buyer is extremely upset and immediately calls the builder. The builder tells them that the contract is ratified and that they are bound to move forward with the purchase. The buyer is told that if they walk away from the contract, they would lose their Eearnest Money Deposit ($45K).

At this point, the buyer is screwed either way. If they proceed with the purchase, they'll be overpaying for the property and getting hosed on the rate and points. If they walk on the contract, they'll lose $45K.

This is a sad, but true story and it happens more often than you'd think. Don't let this happen to you.

Hire an experienced Buyer's Agent who knows the ins and outs of new construction and local real estate market values. And it won't cost you anything extra – the Buyer Agent's fee is already built into the sales price of the home (and no, the builder will not credit that amount back to you if you don't have a Buyer's Agent).

Toll Brothers Offers 3.99%, No Points Financing Through Sunday

This just in from Toll Brothers via CNN – Toll Brothers is offering buyers of its existing new-home inventory a 30-year, fixed-rate mortgage at an interest rate of 3.99% with no points paid up-front. That's compared to a rate of 5.59% for the average 30-year, fixed-rate mortgage with 0.3 up-front points, as reported this week by Bankrate.com.

If you get a $417,000 loan, you would pay $1,988 a month with a Toll Brothers mortgage as opposed to $2,391 a month with the 30-year rate quoted by Bankrate. That's a saving of $403 a month.

"The offer is aimed at people waiting for the rates to drop," said Don Salmon, CEO of TBI Mortgage, the Toll subsidiary that will provide the mortgages. "It will be a strong catalyst for potential buyers to get off the fence."

This deal is only good through this Sunday (1/25) and it's available on homes in 270 Toll communities across 21 states (including VA).

Feel free to contact me for more information about the deal, which Toll communities are participating and about available lots and models.

UPDATE: Toll sweetened the deal! Toll says that the 3.99% rate could also be locked in for as long as nine months. That option is aimed at Toll customers who want to purchase a new, built-to-suit home, rather than existing inventory.

How to Apply for Loudoun Neighborhood Stabilization Program, List of Designated Areas

Loudoun County just released the name of the neighborhoods that qualify for the Neighborhood Stabilization Program (NSP). This is part of the NSP application process to, which Loudoun will submit to Virginia at the end of this month in hopes of securing at least $2 million to buy foreclosed properties for rehab.

The designated neighborhoods are (Adobe Reader required):

• Crestwood Hamlet
• Heritage Square 
• Hunington Ridge
• Sterling Park South (A)
• Sterling Park South (B)
• Sugarland Run

The application for the Neighborhood Stabilization Program requires Loudoun County to provide a list of qualified buyers that would be interested in purchasing a property in these designated neighborhoods.

If you are interested in purchasing a property in one of these designated neighborhoods through the Neighborhood Stabilization Program, contact me and have the following information ready:

1. Name
2. Address
3. Phone number
4. Pre-qualification letter from a lender (aka "approval letter" or "lender letter")

Important…

• The deadline for these applications is January 27, 2009 (the application from the county is due to Virginia at the end of the month and these applications need to be a part of that)
• Without the above information, the County will not process your application
• The information listed above is required by Loudoun County as well as Virginia - this is not a gimmick to get your information for my own records (I was asked by Loudoun County to be part of the group providing input into the program and application process)

My contact info: danilo.bogdanovic (at) gmail (dot) com – 703.582.6900 (cell)

2009 Loudoun County Assessments Coming Out Tomorrow (1/23)

Ahhhhh…it's that time of year again – time for Loudoun County real estate property assessments! It's when everyone rushes online or to their mailbox to find out what their their 2009 Loudoun County real estate property assessments came in at.

And, of course…to see how accurate (or inaccurate) they are.

If you're biting your nails in anticipation, you only have to wait less than 24 hours because 2009 Loudoun County real estate property assessments are being mailed out tomorrow (1/23).

If you really can't wait a few days for the snail-mail, you can go online to view your assessment tomorrow. Assessments will be available on the Loudoun County Assessor Office's website sometime after midnight tonight.

Want to appeal your assessment?

Follow these instructions, fill out the "2009 Real Estate Assessment Review" form (not available online until tomorrow, 1/23) and send it to the Loudoun County Assessor's office. Make sure it's postmarked no later than March 3, 2009 otherwise it won't be accepted.

If you have questions, check out the FAQ section of the Loudoun County Assessor Office's website or drop me a line.

Note: According to some, Loudoun assessed values are supposed to drop an average of 12.8 percent in 2009. So how much did your assessed value drop (or increase) in 2009?

UPDATE 1.23.09 – The 2009 Assessment Review Form (for appealing your assessment) is now available – just click here.

New Law Regarding Builder Incentives Delayed

Last month, HUD passed a new law banning home builders from tying their incentives to the use of an affiliated lender (and for good reason – post about this to follow soon). This law is part of HUD's RESPA reform and was supposed to go into effect January 16. Unfortunately, HUD has delayed putting that law into effect.

One reason may be that the National Association of Home Builders (NAHB) is suing HUD in an attempt to block that law from passing. If the law passes, builders will lose revenue generated by their affiliated lender businesses so they have quite a lot at stake.

HUD has agreed to delay implementation of the law by 90 days (as of earlier this month). As I hear more, I'll keep you posted.

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