Print this Page

View All News

Don't rush decision to use builder's lender

Published Mon, 29 Jan 2007 12:00:00 GMT
Financing issues with new homes

Jack Guttentag
Inman News

Finding the right home mortgage loan provider is complicated enough, but when you buy a house from a builder who has an in-house lender, the complications multiply. The builder wants you to use his lender, and will offer significant inducements to do so. This puts many buyers in a quandary as they realize that the inducements must be weighed against the likelihood that the builder's lender will overcharge them.

Offering inducements is legal if it is done properly. A builder cannot post a sale price of $290,000 and raise the price to $300,000 if a buyer insists on using his/her own lender. But a builder can post a price of $300,000 and reduce it to $290,000 for borrowers who use the in-house lender -- as if there was a difference!

In developing a strategy for dealing with a builder pushing an in-house loan provider, it is useful to know where the builder is coming from. He expects to make money on the lending operation, but the main reason for having a preferred lender is to provide assurance that home sales won't fall through because of lack of financing.

The builder wants to avoid investing significant marketing dollars in finding a buyer who then leaves him at the altar because his loan doesn't come through. This won't happen with his in-house lender because of some prior arrangement with the builder. While the arrangement can take many forms, the thrust of it is that in the event that a loan to a buyer can be closed only at a loss, the loan will nonetheless be made, since the profit margin on the house will more than cover it.

For example, if the buyer turns out to have previously undisclosed credit problems that make him unacceptable except at subprime loan terms, the in-house lender will make the loan and sell it at a loss.

To make up for these losses, other buyers are overcharged. Since the builder cannot require buyers to use the in-house lender, he encourages them to do so by offering concessions that he hopes buyers will value by more than the overcharge. For example, if the loan overcharge is $2,500, the builder might offer kitchen cabinets with a retail price of $3,000, but which cost the builder only $1,500.

It is a mistake for a buyer to commit to a builder with an in-house lender without knowing the financial part of the purchase. The true price of the house when using the builder's lender is P + O - C, where P is the posted house price, O is the overcharge on the loan, and C is the value to the buyer of the builder's concessions. This is the price that should be used in comparing houses offered by different builders.

The extent of the overcharge on the loan should be measured in present-value dollars by shopping one or more online lenders on the same day. I will have a detailed explanation of exactly how to do this in the version of this article I place on my Web site.

The value of concessions is the value to the buyer, which could be less, perhaps considerably less, than the value suggested by the builder. If the builder's concession is to absorb some or all of the settlement costs, the buyer should check the alleged cost savings against those shown by online lenders such as Amerisave, E-Loan or IndyMac.

In comparing true prices of different builders, buyers should give the builders ample opportunity to sweeten their concessions in order to make the deal. Especially in the kinds of soft markets that were common in late 2006, aggressive bargaining can yield a large payoff.

Some buyers may find themselves in a situation where a particular house is the best deal, despite the fact that the builder concessions have less value to them than the loan overcharges. In such cases, in negotiating with builders, buyers can offer to allow themselves to be approved by in-house lenders, while reserving the right to use their own lenders. This removes builder uncertainty that deals might fall through due to a failure to fund, and should make them more amenable to the use of outside lenders.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.

***

What's your opinion? Send your Letter to the Editor to opinion@inman.com.

Copyright 2007 Jack Guttentag

__________________________________________________________ Advertisements __________________________________________________________

GREEN EVENTS

> 2/18—ULI New York – Healthcare Real Estate: Strategy and Investment in an Economic Recovery (New York City). The demand for healthcare real estate, particularly medical office buildings and other ambulatory care facilities located on hospital campuses or sponsored by hospitals, will continue to grow as the economy recovers. Join a panel of industry experts that will share their views from different corners of the market. More info here.
> 3/9 to 3/11—NESEA's BuildingEnergy Conference (Boston, MA). Generating truly new ideas in the world of sustainability requires whole systems thinking, a cross-disciplinary approach, and rigorous standards for content and case studies. Find all this and more at NESEA's BuildingEnergy Conference March 9-11, 2010, at the Seaport World Trade Center in Boston, MA. BuildingEnergy is the only conference where architects, designers, planners, builders, policymakers, manufacturers, and installers work together to determine what's possible. This year's theme: Reduce, Retrofit, and Renew. Conference sessions range from emerging trends in renewable energy to deep energy retrofits of commercial and residential buildings. The Trade Show features 160 exhibitors with the next generation of sustainable technologies and products. Register on line at www.nesea.org/buildingenergy.
> Ongoing—WATER: H2O = LIFE (New York City). Examine the most vital liquid on Earth through a series of exhibits at the American Museum of Natural History.
> E-mail us to list your event here

---

RESOURCES
> New Jersey & Company — Business & Green news
> NYInc — Business & Green news
> NY House Magazine — Green Real Estate
> The Daily Green — The consumer's guide to green
> Green Inc. Blog — NYTimes.com — Energy and Green Business

GREEN NEWS SOURCES
> Alternative Energy News
> Climate Biz
> Climate Change News Digest
> Environmental News Network
> Global Climate Change from BBC News
> Green Business News
> GreenBiz.com
> Green Tech from CNET
> Greener Choices from Consumer Reports
> Greentech Media
> Greenwire
> Point Carbon
> Renewable Energy World
> Yale Environment 360
> Washington Post: Green Science. Policy. Living

__________________________________________________________ Advertisements

---

CONTESTS/COMPETITIONS

Best in Green Building Competition 08
See the innovative & inspiring homes submitted!

---

---

---