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.

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).