Homebuilders and Abusive Practices

Courageous blog. It is tough to balance consumer friendly discounts with the law. I am not sure there is a respa violation there either.

 GM,

First and foremost you friend should have had an attorney review the contract prior to signing a contract.

Second, what the builder was offering is an "Incentive" which is very common.

Dealing with builders isn`t difficult you have to know how to "play the game'.

Why didn`t you represent your friend or suggest a Realtor you trusted? 

As soon as the builder's lender rejects the loan, it's typical that the incentive will go with whomever the buyer chooses.  As you know, nothing illegal about it- builders like to have all of their loans in one place, due to tracking- not to mention the gamble when it's a dicey loan, a promise is made to get it done, and an outside lender lets it crash at the end.  Just a neccessary evil.  I'd mention the fraud attempt to the builder (have the buyer express having been made to feel uncomfortable) and see if that helps.  Most homebuilder lenders are OK- sounds like your friend got a dud.

Charlie- Thanks for the feedback,

Scott- I agree, my friend should of had an attorney review the contract, 2nd nobody should have to play a game, this is NOT a car purchase, and last, I am not a realtor, so I could not represent my friend and I did suggest a couple of agents to him, which he decided against (his choice), my point is not if the builder is breaking any laws, it has to deal with doing the right thing for the customer.

Laurie- This is the approach, I have used with builders in the past, and you are right is usually works, however, it seems like this builder currently does not want to budge on this one. 

I have only been licensed here two years and have sold a bunch of new construction since.  I agree with you about your assessment of builders.  I also agree with RESPA violations.  They hike the prices, pare down on incentives, hike the earnest money, take away Realtor commission, etc if the buyer wants to use their own lender.

I think the one page affiliated-business disclosure in their 100 page contracts that is always explained in the most candy coated ways covers their butt when it comes to RESPA.

Yes, some home builders are so smug and abusive, that you have to wonder if their is a used car and new home construction sales training school.

Renee-  Thanks for commenting, I cannot agree more with you, I posted this after reading about your little ordeal with a builder and thought about my situation, so thanks again.  It good to hear this from agents, who understand how builders can be abusive.

James- That would be a great advertisment, Come to ABC Sales School and learn to become a new home sales person and a car sales man, LOL, too funny.

I don't understand this industry.  We don't like builders, Agents don't like lenders and Lenders don't like Agents.  Without homebuilders we wouldn't have jobs!!  This is an industry issue.  Abuses happen, but not all Builders are bad.   Builders have their necks out on the line big time and they need to move product. 

Kate- This is just my opinion and please do not take it wrong, because I respect always what your comments are, however, in the 14 years I have been in the real estate industry, as much as realtors and lenders like to prick each other back and forth, I feel the corporate builders have really lost touch with their clients, its alway a win for them and sometimes a win for the others, just my opinion, thanks for sharing yours.

Gary, I appreciate your comment back to me.  One of my pet peeves is broad generalizations and this one just hit my funny bone. You may be right, I think that our whole industry got so strung out on profit that we forgot the big picture and shot ourselves in the foot.   

Kate- I do not like to bash any groups, including builders, however, this was a very true situation that is going on right now.  I also agree that we need to work together. 

I've run into this situation a couple of times.   I don't have anything against builders, but I do have an issue with the builder who has a vested interest in a mortgage brokerage and pressures buyers to use that broker, regardless of the level of competence of the broker's LOs........

Seth- Spoken like a truth professional.  I could not agree more with your comment.

Gary, tell your friend to keep fighting.  You always get stonewalled on the first request.  It takes a lot of effort and nagging, but if he can eventually cause enough ruckus to get to a decision maker, pragmatism usually wins out.  Builders are scratching and clawing for every buyer, and I bet they'll cave if the threat of walking is legitimate.  I had a very similar experience with a home builder in Queen Creek recently.  My buyer opted to go with the preferred lender for the very same reason: huge incentives.  After the "preferred lender" went under (American Home Mortgage), my client wanted to return to his lender of choice, Wells Fargo, with incentive intact.  Even though their preferred lender submarined, they balked at our request.  It took blood, sweat, tears and a little more sweat before we finally kicked it all the way up to the company president, who eventually yielded.  I won't stick an unsolicited link in your blog comments, but let me know if you are interested in reading the rest of the story and I'll edit it in. 

I, too, am a real estate agent in the Phoenix metro area and have encountered this builder incentive program.  I have learned to ask for the builder's list of preferred lenders and present it to my clients along with other various lenders offers so they can weigh out the options.  Our responsibility to our clients is to educate them so they can make a responsible decision concerning their unique financial circumstances.

Another option for buyers, is the massive resale inventory that is plaqueing our newly developed track home neighborhoods.  A home 1 to 2 years old can be bought for less than the original purchase price using your choice of lenders with all the upgrades already in place by previous owners.  This includes landscaping, window treatments and pools to name a few.  There are always options!  Think outside the box!

Its wierd.  It seems the builder would want to have someone else d othe loan if the internal person can't.  I hope the issue with builders forcing certain lenders gets cleared up.  It seems like it would violate RESPA.

Interesting post. Thanks for sharing.

Gary - This is a great post.  Congratulations on getting your first "featured" post on AR!

Gary, why not align yourself with a builder and build a partnership?  You might learn more about why they do what they do and you might make a little income in the process.  When biz is slow, Everyone offers incentives to get their product moving at higher velocity.

While there are respectable builders out there, there are many whom I question.  Here in Southern California they are happy to have us (Realtors) bring them a client but they immediately want us to go away.  They want the deal on their paperwork I am sure because that limits their liability to a great degree and they literally tell us to go away and wait for our commission check.  I for one represent buyers and my clients are my clients regardless of their buying a builders home or a home on the resale market.  I feel it is my job to escort my clients through the entire process and help them be sure they are doing their due diligence.  Builders want no part of this, don't want inspections by outside sources nothing.  Just go away, we will handle it is what I get from the sales people. 

My question is what are they worried about, are they hiding something?? Behavior such as this raises lots of suspicions on my part.

Thanks for your post, I know where you are coming from.

I think that there are great builders and there are really bad builders, just like any industry.  Keep in mind that these builders really do put a lot of money and their necks on the line, but that doesn't excuse some of the tactics that they use.  One tactic that is currently going on in my market is builders offering Realtor's up to 10% commissions on overpriced houses!  My feeling on it is that I signed up for 3%, if you have another 7% to give then give it to my clients.  Don't expect me to try and "con" my buyers into paying too much so that I can make an extra buck.  I can just imagine an agent hoping and praying that the buyer doesn't look at the commission portion of the settlement statement at closing.  Just my opinion though :).    

Gary,

Geez... I can fill up AR with all of the battles we've had to go through when it comes to New Home builders. All of them came against clueless new home sales agents or their managers and when we talked to the "Right People" things were taken care of.

Personally, I've never met or talked to somebody that was the the "Right Person" that would blow a sale because somebody was a little more educated/represented.

Yep -- that even included tracking down the VP of a major homebuilder through Public stock records to explain a situation where the new home sales agent, their manager and the regional sales manager would not budge on.  It was immediately taken care of with a phone call to Colorado and explaining the situation which had to do with an incompetant "Preferred Lender" of the builder.

Interestingly for whatever reason, at one point I had plenty of people not represented by a REALTOR when they went into contract with a new home builder asking me for help which I would have to politely say: Sorry, I did not represent you NOR do I know the exact details of your situation. Please contact a Real Estate Attorney to evaluate your complaint.

If You go into that sale office without somebody on your side that can see red flags, don't cry. (The true stupidity of the whole situation is that REALTOR representation is absolutely FREE!)

Your friend's problem wasn't the home builder or the lender.  Your friend's problem is that he likes to jump out of planes without a parachute.  He's probably very good at what he does, but real estate isn't his business and he did everything wrong.

I sell new homes all the time.  In fact, new homes are all I am selling this year becaue resales are far overpriced.  New homes are a much better buy today.   

If your friend had been represented by an agent experienced with new home sales, this blog would never have been written because all of the problems described could have been avoided. 

In fact, this gives me an inspiration for a blog. 

Gary,

I understand your point. It would be great if the world was an equitable place. It's not. People are always looking for an opportunity to get over on others all the time. There will never be an end to this kind of behavior, so it's that much more important to be prepared for these things to begin with.
I hope your friend can get himself out of the pickle he got himself into.

Production builders in my area are all offering obscene incentives to get their communities built out.  I sold one recently that was similar to your experience. First offer: $30K off and 3% contributions to closing costs if the buyer uses their affiliated lender.  Seller checks into it and finds cheaper interest rate and better terms with a proven local lender that does a ton of construction loans. Corporate affiliate says they'll match anything the buyer can get elsewhere.  We continued to negotiate with the developer on pricing, options, etc., and got to $50K off a $275K house.  Buyers decided to use the outside lender, we got the incentives, but not the 3% contribution. There's more in the middle of this scenario, but this is an accurate summary. 

Regarding RESPA violations, I guess it could go either way. They certainly are offering 'inducements', but if they can prove a history of giving the incentive to buyers using non-corporate affiliated lenders, is that still a violation? I don't know. That's a good one for a Real Estate attorney.  Their stated logic was that their lender knows how to get these transactions completed, on time and with no 'surprises' to the buyer that makes the builder look bad or that upsets the buyer. 

I've been on the 'surprised' end of a couple of transactions with less than diligent loan reps and I can understand their position in a way. I'm sure that would never happen with you, Gary, but like some Real Estate practitioners, the quality of service with loan reps varies greatly from superb to imbecilic.  It's important for new construction buyers to have an attorney review contingency included - and to actually have an attorney review the contract! You can get changes made to their boiler plate if a deals hinges upon it.

Gary,

My first thoughts were that the bad make it very hard on the good.  No matter whether it is a bad hitchhiker, bad car salesman, bad cop....etc.  But to say that homebuilders as a group are not to be trusted.....that is bad too. 

My husband has been a Class A Contractor, custom homebuilder, spec homebuilder, developer all of his life.  He started working as a child for his father who had his own crew.  My husband has been licensed for 43 years without one complaint.  He is honest, hard working, builds quality not quantity. 

He has built custom homes for families, their children after growing up and then for the parents as they wanted something a little different (not necessarily always downsizing).  This has happened several times.

He has the respect of everyone in our area for being honest and direct.  So to group homebuilders as the 'bad guys' is rather unfair.

  I am a Realtor and a lot of people don't like Realtors.  They have this idea that we all wear the most expensive of everything, clothes, jewels, etc. and drive the most expensive vehicles and make squillions and do nothing.  They think we are in a get rich quick position...I've always maintained that my job really begins when we get the property under contract....getting to the closing table is sometimes the tricky part.When I began my real estate career I told my Broker that unless I could do my work honestly and ethically, then I would not hang my license in his office. is a good thing no matter what you are doing.  Bad news goes much further and faster than a good news.  I think your friend needs to have a Real Estate lawyer read the contract and see what can/should be done. 

Great post!  We here are starting to see this scare tactic drop off right now bc of foreclosures and lawsuits! 

Gary, I share your sentiment about builders!  At the same time, I understand why they want the loan with their lender...CONTROL.  It's a shame though that they can't see that when their lender isn't helping them CONTROL the situation, but is actually going to cost them business, they really need to re-evaluate the situation.  I've had the exact same thing happen.  They're also very good about keeping the buyer's agent out of the loop as much as they can.  The communicate directly with the client, not the agent, they change the rules of the game constantly, and it's a different situation with every builder...so you never know what you're going to get.  Unfortunately...they're a necessary evil.  I just wish they'd learn to work better with the rest of the real estate community.

Incentives are common are they? Each builder have their own methods of getting the sale closed.  I guess as long as the law is not broken.

Paul- After all the back and forth agruing, just yesterday afternoon the builder finally gave in and my friend now can use whatever lender he wants.  It was a shame though that he had to threaten them before anything would be done.  PS, feel free to share your plug. 

Barbara- Thanks for your input on this and sharing with everyone on AR the inventory that is out there, I told my friend this, however I think his in-laws were pushing for the new home.

Ki- "It seems like it would violate RESPA.",  I wish is was, but its not.  However the point is that we still have ethical and moral obligations to consumers, and this is where I feel the builder was at fault.

Bob and Carolyn- Thanks for the comment.

Jason, Thanks for noticing, and yes I am a very excited about my first featured post.

David- I respect your comment, but I still will not be seeking those relationships,

Again we come to the "QUALIFICATION and EDUCATION" that is required to be in the rela estate industry either as a real estate agent or mortgage broker.  When will NAR take a stance?

You're painting all homebuilders with the same brush - that's like remarking on ALL Realtors® or ALL mortgage lenders. Addressing the practice is more to the point, and there, too, some offer competitive products and others don't. It's always good to rely on an agent who knows the difference.

Sounds very similar to the issues many are facing.....good conversation throughout the blog.  I am the guy that works with these builders to secure the land prior to construction so obviously I like the builders for they are my bread and butter.

I've talked with a few regarding the mortgage issues before and if you only knew how vested they were in many of these companies you would cringe even further.  It is an issue that somebody needs to look into, however not all builders practice these elusive and abusive tricks to finalize deals and should be given the benefit of the doubt unless it is quite evident they have manipulated the contract.

Darrel- "My question is what are they worried about, are they hiding something?? Behavior such as this raises lots of suspicions on my part."  Its just bad behavior. 

Bryan-"I think that there are great builders and there are really bad builders, just like any industry.",

This is very true, the above situation has not happened with all builders. 

Paul, great comment, I feel that builders need to do a better job training and empowering their sales people to make decisions.  There should be no reason why this type of situation needs to be escalated all the time.  Also, I agree, my friend should of hired an agent and I feel some of these things would not of happened, and if they did, the agent would of been there for him. 

Lenn- Spoke like a True Real Estate Professional.  I agree with you 100%

Andrew-  My friend did win the battle late last night.  Fighting hard pays off.  If we want this behavior to stop, we need to educate the consumer.  I hope this post does just that. 

Robert, thanks for the comment, our clients should get to use whatever lender they want and yes, there are good lenders and bad. 

Gail- Please do not take this post as bashing builders, I did not intend for it to be stated in that fashion.  I will be upfront and let you know, that in my 14 years of experience, I have just seen more abuses from this group then any other.  There are some great builders out there.  My point was just to do business with the best ethics for the client in mind.  This builder was not doing that until my friend had to start getting angry and very upset and threatening them.  My friend finally did get what he wanted but it should have not had to come to that. 

Scot-Thanks for the comment, true,

Christopher- This is the same way, I looked at it.  Their inside lender did not know how to do the loan.  This is nothing wrong with that, just be upfront and let someone else who can help the client do it.  Then stating they will not honor the incentives, wow.  luckily my friend worked it out. 

Rosemary- I agree, no laws were broken, just bad judgement on their part.

Allen- "When will NAR take a stance?", I am wondering when our entire industry is going to take s stance, its bad on my end too.

Sharon K.- great comment, I wish my friend would of listened to me, however consumers sometimes make bad choices.  2nd, I do not expect anyone to have the biased opinion that I have about home builders.  Its just my opinion.  Just like some of us, do not like to work with certain people, I just choose not to work with builders if possible.  Thats all, and please we do not want agents building spec. homes, we have enough problems. 

Sharon- I agree, I am painting all builders to a point with the same brush.  But this is just an observation of 14 years in this industry.  But the above situation has happened more then once, I just finally decided to post on this specific occasion. 

Rick- Thanks for shedding some light on more builder abuses.  We really need to educate the public, and I hope it starts with posts like this. 

Sharon K- I do not even want to get started with builder lenders.  When I used to work for a big box company, they used to asked the newest and least experienced lenders to sit the new home offices for loan applications, the consumer sometimes ends up with the least experienced person, due to some contract signed to get their seed money.  The consumer, should have a choice. 

Oops, forgot to log in:

 Gary,

 Put together an approval for your friend, and have him take your approval to the builder to show his scenario is possible at a decent rate and associated costs. The builder's lender may duplicate your efforts and still get the business (if the representative is a dud, as mentioned earlier), or might agree to let him go outside per the approval presented. I have found most builders to be resonable when presented with supporting documentation, involve the builders sales manager as well. The builder wants to move the inventory (using the inside lender is a plus) but they want the sale most inportantly.

Wow, I have never heard of this one before.  Interesting situation.  I wish your friend the best of luck Gary.

Douglas- Late yesterday, the builder caved in and let my friend go with outside lending.  He had a fun battle.

Chris- Thanks for the encouragement

I have heard horror stories too. Thank you for writing honestly about this.

It amazes me when builder offer "X" amount in discounts for using their lender, obviously more than the lender could possibly make in profit, but then refuse to offer any incentive if the borrower uses an outside lender. Simply stupid.

Christina- It is the month of Halloween, maybe this is bringing out the Goblin in all of us. 

Sean- You see if the same way I see it.  Common sense thrown right out the door.

Im just getting started in the business and Ive heard things about builders that just make it seem like they cant be trusted and just like you guys are saying " used car salesman" . Thats why i feel good every day knowing i can represent my client so that i take of his or her interests over anything else.

Gary - Why don't you suggest he take what is on the table and do an no-cost refi for him next week.

I know some homebuilders, and some are good people, and I have meet some like you describe.

I have worked with both good & not so good builders.  I have inherited several naive investors.   In this market I work with both resale, builders & rentals.    Investor in this market find themselves in an adverse situation  My current rental clients put their investment with a property management company, they were listed on the MLS.  I was working with a very qualified rental client.  Credit score high 700's.  I contacted the property management company, they told me they were no longer handling the property.   My client wanted the property, it was perfect for them, the property management company didn't give me info, I went online and found the phone number for the owner, called and they didn't even know the property management company was not handling their property.  In essence, I leased the property, they had 2 other properties one which I leased and the other I referred out and it was leased.  They had a friend who had a rental in the same area.  I leased that property too.  Both clients had purchased the properties form the same builder, through an agent who represented the builder, they used the builders lender.   They closed in February 2007, they paid too much, they were ready to back out, but were convinced to close.  The market, at , at that time,  was already several thousand dollars below their purchase price, the builder convinced them to close anyway by offering them a very generous "incentive,   $60,000 in escrow to pay their interest only loan payments for approx. 24 months.  They were told that they could make a lot more than was reasonable on rent  They were looking for a lease purchase at a profit.  Which wasn't in the cards.  

In life the good, the bad & the Ugly exists in every walk of life.  Hindsight is always 20/20.  It doesn't matter that we tell people to contact their attorney, CPA or????  There is nothing we can do if they don't listen.  There is nothing we can do about agents, buillders, lenders,  who are only looking at their bottom line.  The best of all worlds would be to have clients that listen, as we listen to them, lenders who have integrity & builders who will work with us in an honest, respectful manner. 

Hindsight is always 20/20.    

i only read the first few comments before zipping down to post, but i agree with Laurie that perhaps mentioning the suggested frraud attempts might remind them that your friends aren't pushovers and can cause them more trouble than their greed is worth.  I used to sell for a builder and I did deal with this regularly.  In this market, most builders tend to understand that the buyer has a bit more control, and the squeaky wheel tends to get the grease.  If it's a big builder, climb up the ladder until finding someone who will listen... it should happen at some point. ...it's usually a game of chicken and they're just playing tough right now.

speaking in generalities, of course, but that's my experience.

This is a common story in California, the builders even go so far as to promise a additional incentive if buyers use their inhouse lender but they have been  known to give verbal promises to allow outside lenders receive the same concessions just as long as the buyer signs the contracts.  Later, of course, the builders renig on their verbal promises of allowing outside lenders get the concessions.  Its Carnival Barking 101 A.   kirk mulhearn , mortgage/real estate broker, Long Beach, Ca.

Gary -

Just to add on -- I've been on both sides and I also worked for a developer selling new homes. One of the reasons we selected a "Preferred Lender" for the development is because of all the hacks in the lending business. Having a "Preferred Lender" made our jobs easier knowing that the purchase was legit and not a lender just trying to stretch something to collect a fee.

Personally, As the Director of Sales, I would waive this requirement with a quick phone call to the "Outside Lender" and getting the "right" answers to my questions.

I'll stand by the fact that I have yet to meet an actual owner/developer that will blow a sale because a buyer wants to use a legitimate outside lender that can justify why the buyer should have an outside lending source --- especially in these times.

Todd-  As a newer agent, my advice is just educate your clients and spend more time with them about using your services when buying new homes.  I feel agent representation is always important, but its so much more critical with new home purchases from builders. 

Duane- Thanks for the comment.

John- I am not sure what you mean by that?, but thanks for the comment, maybe clarify

Dwayne- I agree, there are some good builders and some as described.  But the abuse happens.

Cindy-My only comment to you is "Spoken like a True Professional".  I still do not understand why clients do not listen, I think Lenn Harley summed it up perfectly in her comments above.

Dan- Your suggestions and Laurie's will be used next time this happpens again, by the way, my friend won the battle and I am now helping him secure a good loan with terms he can live with.  Oh and my loan is not asking for loan fraud to be committed. 

Kirk- I have read about extreme cases in California like you stated.  There are some lawsuits going on in that state with consumers sueing builders.  It will be interesting how the courts interpret Respa in the next couple of years, and if builders will be able to continue to operate in this manner.  Thanks for the comments. 

Paul-I truly understand why the builders use internal lenders, and I agree most builders will not blow a sale because of this, but this still does not make it right for the builders to abuse the client to the point that they call an attorney until the builder finally gives in.  There is good business and there is bad business.  My point of this post was to try to educate the real estate community and consumer about some of the builder abuses.  Also, when the market was HOT, the builders did NOT allow hardly any outside lending, and I have consumers calling me now in deep trouble on their mortgage because the builder's so called lender, put them in a real bad loan.     

Gary,

Thats great, I figured they would once the facts were brought to their attention on what the "real" world could put together.

Gary,

Since I have your blessing to share, here is the link to the blog that I referenced.  I think you'll appreciate the similar difficulties my client had with a builder in Queen Creek.  While I subsequently followed my post with a reminder for buyers to secure the services of a buyer's agent prior to purchasing from a builder, I can see a case for posting a similar blog about bringing your own lender to the table as well.

http://activerain.com/blogsview/194950/How-to-go-from

Douglas- I just spoke with the builder on Friday, and it funny how he is so excited to work with us now.  LOL

Paul- I agree with you 100% I will take a look at the post.  Thanks again.

Having worked with builders both as a Mortgage Banker, not a mortgage broker, and as a real estate broker I must refer you back to Lenn's comments. If you know what you are doing you are less likely to get hurt and it seems your friend wanted to have all of the benefits and none of the consequences.

Paul M- I thought Lenn, summed it up perfectly.  Luckily we got it all worked out with the builder now. 

Bill- My client lucked out and got it worked out with his builder.  I just sent the builder my conditional loan approval just yesterday.  Thanks for the post.

I have had two clients go to a new homebuilder in the last two months.  They both went without me. On the initial phone call or visit, they have each refused to give the builder any signed information about themselves and have said they are already working with an agent and that's that.

Both times the builder's agent told them that if they don't come in with an agent, the builder can afford to drop the price drastically, by amounts of $10,000-$30,000.

Both times my clients believed them and proceeded to negotiate without me. Is this legal?

Amy- I am going to give you the old "Well I am not sure and you should seek advice from a qualified attorney", but it sure sounds bad anyhow.

 If it is legal, it is 100% abusive, and I would file a complaint with your Real Estate Board ASAP.  We all need to do everything we can to stop abusive builder behaviors. 

Bill- Can you direct me to the FTC rulings if any.  Do you have an article to share?,  Let me know.  Thanks.

Two thing, I have heard not just from Realtors but from people who have worked with builders that they cut corners and the way they write up their contracts favors the buyer less than if a Realtor was with them. The second, there is so much inventory out there right now that you can get a great deal on a vacant home or a Forclosed home as well

I think you have to expect that anybody that has a pre-printed contract is going to have it favor their interests over the other party's.  Even when I have represented buyers with new construction, you may ultimately have to reduce it to the builder's contract. I do agree with you that a good buyer's agent will be able to get more in writing to favor the buyer than the typical consumer that walks through the door unrepresented.

Todd and Robert,

Did you know that HUD finally did away with this practice, please see my most recent  blog post:  HUD Halts Abusive Home-builder Practices