Take a walk through a new home community these days and you’ll notice one common offering between them: incentives. Builders are throwing every kind of incentive you can imagine at home buyers trying to encourage them to make the move now while inventory is high and rates are low. While the incentives can be appealing (I’ve seen builders offer more than $50,000 off a home’s price or one structural upgrade like a sunroom for $1) there may be an unseen dark side to these seemingly innocuous offers.
On November 17th 2008 HUD amended the RESPA (Real Estate Settlement Procedures Act) to include a new rule that as of January 16th 2009 home builders would not be able to offer incentives to entice home buyers to use their affiliated lenders. In other words, builders offer strong incentives like $35,000 in upgrades included in the price of the home or all of the home buyer’s closing costs paid by the builder but in order to be eligible to receive such incentives you must use the builder’s affiliated lender and/or title companies.
Builders are arguing that the tie-in to affiliated lenders ensure a smooth transaction and lessen the chance of a delayed closing date which is, in their opinion, a benefit to consumers. On the other hand, HUD claims that by tying these hard to resist incentives to using a specified lender or title company that home buyers are left with few alternatives and could end up paying more for the home by going with the builder’s affiliated companies.
Shortly after the NAHB (National Association of Home Builders) and the co-plaintiffs (13 large builders and their affiliates) filed for an injunction to prevent the implementation of this new rule on January 16th HUD reacted by agreeing to delay the rule for 90 days. There is still no word on whether HUD’s decision was satisfactory enough to make the NAHB et al withdraw their complaint but there should be plenty more action on this in the coming weeks.
What do you think? Are the builders right when they say home buyers benefit from the incentives offered that require the use of the builder’s affiliated companies or is HUD protecting consumers by forcing home builders to offer these incentives to all buyers regardless of which lender/title companies the buyers choose to use? Let us know in your comments below!
Joshua Ferris is an Orange County NY real estate blogger and associate broker with Keller Williams Realty in Central Valley, NY who specializes in townhouse/condo communities like Brighton Green in Newburgh New York. Learn more about Orange County by visiting Josh’s Monroe New York real estate guide.
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I’ve never liked the incentives that builders offer when using their “preferred lender” If builders want to discount upgrades it should be done across the board and not because it makes the job of the sales office easier when they work with fewer lenders. There is a definite trend away from incentives of any kind in real estate. I hope that HUD decides to go through with this as it protects consumers.
I’m with Carolyn on this one – Where’s the true accountability with the “preferred lender”? Don’t get me wrong, some lenders did a wonderful job wearing “both hats” in these cases — but who does the lender have more incentive to appease? It’s a slippery slope, one that IMO, we don’t need re-visit. Great post, Josh…
The builders “preferred” lender may be a little less preferred
when it comes to rates! In Canada if your paying 1/2 of a percent more on a $400,000 dollar home – Your paying 10,000 more over 5 yrs!
Carolyn – I’m with you on this and I hope HUD doesn’t cave under the immense pressure to remove this rule.
Kevin – I don’t think I’ve ever seen a builder company wear the same hat properly with the exception of one national builder who is leaving my area that offered these incentives but didn’t tie it to a lender. They didn’t really have much choice though because their preferred lender wasn’t licensed to do business in New York state.
Paul – I once had a buyer who insisted on using the builder’s financing because of the glamorous incentives which in turn gave the builder’s finance company the option to charge 0-6 points on the loan. Can you imagine signing something with such a huge uncertainty?
Other than the handful of “all in one” builders we have with their own financing, its not something I’ve seen too often here.
I agree, incentives should be to anyone despite which lender, otherwise it makes one a little suspicious of kickbacks or if they’re raising fees for those incentives.
I agree with Carolyn as well. I see these incentives tied to using the builders lender as being bad for the the public and possibly bad for the buyer as well. There is to much opportunity for bad appraisals, and pushing people into getting mortgages which in the long run the buyer cannot afford. If the builder wants to give incentives, be upfront with them, and take them off he price of the home with out any catches.
The incentives have always acted the opposite for me, meaning they tend to turn me off on purchasing, not just in real estate but anything for that matter. I usually get the feeling that if a company is trying to sway your decision to purchase, it is because their product lacks something that they are trying to make up for.
With all of that being said, I know that there are several builders here in my area that are offering 5 year guarantees on weather proofing, free hvac systems and so on. Apparently, people enjoy these types of offers because these builders seem to fill up their neighborhoods rather quickly.
I am a builder and Realtor. I believe that if a builder is using their money to create an incentive to buy, the buyer and their attorney can evaluate that it is what it is proported to be. I agree, the builder wants to have people to move the transaction who are tune to what is being done. I have found that many time when thing are left to a lender who is not set up for the specialties things,the loan will either not get done or have alot of kinks in it.
Richard
Richard –
I heartily disagree with you. Builders co/op marketing expenses with lenders, and in return, tie incentives to that lender. It’s anti-competition, and in my opinion, should be illegal.
If it truly is about getting the job done, then build in harsh penalties to the buyer and/or for not closing on time. In Austin, Lennar will often penalize the buyers’ agent by taking away any bonuses if the property doesn’t close on time. Pretty effective.
It’s been my experience that the incentives and tie-in to the builders’ preferred lenders have been two-fold. First, the incentive can be impressive on the front end. However, there is an added cost to the loan on the backend to the tune of 2-3% origination. So, the incentive’s net value gets reduced substantially. Sometimes the lenders’ rates are higher as well through the builder.
When I have seen a builder require a preferred lender and that lender is a nationally recognized independent company such as Wells Fargo and others, then I see more competitiveness here and the issue less a concern.
An incentive should remain a true incentive. To do so otherwise is misleading advertising in my opinion and so I welcome the proposed change to RESPA.
David Lorti
This is a great discussion, great post as well.
One thing that has not been talked about is that one of the major reasons builders require buyers to use their lender is that the builder owns the mortgage brokerage and the title company. They make a big percent of the incentive back with fees and costs this way.
I think it is rediculous how builders and now many banks are using this tactic, especially with all of the issues currently in the mortgage market. Consumers should be able to choose who they want for their lending needs, just as they can choose where they buy their groceries and clothes.
[...] January 2009 the NAHB (National Association of Homebuilders) filed an injunction against HUD’s revised affiliated business provision in RESPA which would prohibit home builders from offering incentives to buyers that require the use of [...]
[...] into a series of plot twists that completely change the story as you know it. First we started with HUD trying to protect consumers from unfair incentives tied to a builder’s financial affiliates. We all saw how well that worked out. Then we saw [...]