One-Stop Shopping – Part 2

If I didn’t scare you last week with my description of what goes on between related entities in the real estate business, I’ll have another run at it. We talked mostly about transactions in the re-sale market, the sale of previously owned homes. Today we’ll talk about homebuilders and their related mortgage entities.

Remember that the significant objective of both State and Federal legislation relating to this are is that the consumer should have a free choice of providers of services in the transaction. That means that the consumer can choose his own escrow or title company or closing attorney as state custom provides. It also means that a consumer can do business with the lender of his choice. Builders do not want you to be able to do this so they engage in devious tactics to restrict your choices.

About ten years ago, homebuilders figured out that they also might be able to make some money doing loans for their buyers, especially as their marketing cost would be zero. But instead of offering a deal, in effect passing on this efficiency to their customers, they prefer to operate their mortgage entities as profit centers, charging whatever the market will bear.

The problem was that the level of service they offer is generally inferior to that provided by people whose only business was lending. As a result the builders didn’t get much of the business.

One reason is that often the loan people they hire are not top caliber people. The builder’s conception of the job often does not include real sales skill because the companies figured they are giving the customers to the loan officers. Consequently, they don’t offer much in the way of compensation. Thus, no one who is successful in the mortgage business is going to take a 50 percent pay cut to go to work for a builder!

Second, the builder’s primary mission is to get the deal closed when the home is ready, not to get the best deal for the client. More specifically, they are not driven by any obligation to be your agent, as a good mortgage loan officer would be. When push comes to shove, they will do what the boss tells them to, even if that is not in your best interest.

Third, they invariably make a deal to send all the loans to one source, However, it is the nature of our business, as you have learned from previous articles, that no one lender ever has the best deals on all products. Even if most people choose, say, a 30-year fixed rate loan, do you really believe that this one source is the one that always has rates that are better than the other hundred lenders? If you say you do, I want to see your pumpkin truck.

When the builder is buying 2x4’s, drywall, and roofing tiles, their Purchasing Agent is out there beating the bushes trying to get the best deals, so as to keep costs low. But when it comes to finding a mortgage, they don’t do this. They are driven to make a deal that maximizes their profit on the loan transaction. They do not give equal regard to the fact that YOU are the one who has to make the monthly payment!

So you can see that when the playing field is level, the builder’s lender is at a significant disadvantage in competing with normal mortgage providers. The result of this is that the builder’s related lenders didn’t do much business. In order to increase what they lovingly call the “capture rate,” many, of not most of the builders now offer buyers an incentive for using their own lender. They might say, “Use our lender and we’ll give you $4,000 credit you can use at the Design Center .” Or they may just give you a $4,000 credit at closing.

Now, if you are as skeptical as I have taught you to be about such things, you ought to be asking why a builder would do this. All of them are profit-conscious, a lot of them could even be called greedy, so why are they all-of-a-sudden wanting to give money away?

The answer is that they are not really giving away their money!

Next week, I’ll show you how that happens.

Be careful out there!