Builders and Their Business Arrangements...

Have you ever walked into a builder’s model home and after some small talk with a sales representative and a preview of some of the floor plans, been told about the thousands you can save by going thru the “preferred lender” and “preferred title company” when you are looking to buy an investment property? My guess is that if you have visited a builder, then your answer is “YES”. 

The program typically works like this...  The builder is offering $5,000-$10k in free upgrades if you use “ABC Lending” and will only pay for your title policy if you use “XYZ Title Company”.   They know that the buyers will cave in because there is no way that an outside lender or title company can compete with this offer. They already built in the cost for the upgrades and are using these companies as an additional revenue center to increase their profits. They have typically set up partnerships with lenders/brokers called CBA’s (Controlled Business Arrangements) whereby they can legally receive a kickback or profit-sharing from the new entities operations. As long as they are disclosing the relationships, they are not breaking any laws but this form of “steering” is a bit unsettling to me. It creates an unfair advantage in favor of the mortgage company and generally subjects the buyer to “junk fees” and somewhat higher rates because of the incentive to stay the course. 

Here’s the catch, it’s ILLEGAL for them to penalize anyone for not using these affiliated companies. What I like to do with my clients is arm them with the ammunition to defend themselves against this form of strong-arming by refusing to buy an income producing property unless they are given the same benefits as those who willingly get herded thru the transaction machine being proposed. There will be stronger legislation coming down the pike soon to keep the playing field level. But until then, it’s buyer beware and since most builder’s are up against the ropes financially as it pertains to the overall national picture, feel free to play hardball with them just as they have been doing to you for the past several years.

Has anyone been exposed to this sort of practice by a builder? If so, share your story.