Are Builder Incentives Bad?

Real Estate Agent with Keller Williams Premier Partners

Are Builder Incentives Bad for Consumers?

Kenneth Harney writes about real estate consumer issues. He's written about the Feds investigating builder incentives. He wrote that the Obama Administration is exploring the legality of the various financial incentives and other lures that builders use to get buyers into the property. Apparently, this may violate RESPA - Real Estate Settlement Procedures Act - which prohibit consumers being compelled to use specific realty firms, title companies, builders or any other affiliate in the real estate transaction.

There are stories of consumers being pushed into costlier mortgages because the builders insisted the consumer use the builder's chosen lender or lose the incentives. Typically, Harney sites some particularly egregious criminal examples of some very bad behavior by builders and lenders. HUD - Housing and Urban Development - tried to capture the builder incentives under the "required use" language already in the RESPA law. The National Association of Home Builders objected and the court fight resulted in HUD backing down for now.

Maybe the incentives are good for builders and consumers - consumers may be paying less for upgrades and special features; the builder may proceed with confidence building custom houses with a trusted lender managing the loan. That could happen....

The bottom line here, as in most places is that YOU, the buyer, need to understand your options and understand the contract you're signing. It matters when you write your name on the dotted line.

If you have your own buyer agent via a buyer agency agreement, even working with a builder, you have a big advantage. Rule of thumb here: if you don't have a real estate agent, have an attorney. I'm just saying...

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Re-Blogged 1 time:

Re-Blogged By Re-Blogged At
  1. Jill Watts 08/04/2010 01:21 PM
Home Buying

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Carolyn Kolba
Serving Mentor, and all of Lake County, Ohio - Mentor, OH
Keller Williams Realty- Mentor, Ohio

Compelling buyers to use certain title companies and lenders I can understand... because both should be heavily regulated by the state and other governmental agencies.  But... for a builder to require a buyer to use a certain real estate company... something smells fishy to me.

Aug 02, 2010 06:36 PM #1
Mike Mayer
Mike Mayer, Broker/Owner - i List For Less Realty, LLC - Lafayette, LA

Caveat emptor! (Let the buyer beware). It's a common practice for Builders to either own outright or have a business affiliation, with closing or title companies and mortgage lenders. What seems commonplace is for the builder to reduce closing costs if the buyer takes a "package deal" by using the builder's mortgage and title company. The buyer really needs to do their homework and a little math to learn what best suits their budget and needs.

Aug 02, 2010 06:40 PM #2
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

Lynn, builder incentives can be in the long term.  Builders and their lenders may have pushed buyers (before the real estate bust) into loans they very well may not have been able to repay.  Somehow builders have eluded some of the blame in the housing mortgage meltdown.  Many of the things that builders have done, and continue doing, would be considered RESPA violations for sure in residential resales.  Great post, thanks,

Aug 02, 2010 08:50 PM #3
Respect Realty LLC
Respect Realty LLC - Milwaukie, OR
Brokers - Oregon / SW Washington Real Estate

We see it all the time, the buyer walks in without us and even though they hand the agent at the new builders house they say. Hey, if you want this deal you have to go through us or it will cost you more. (A lie of course, but it gets the builder more money) I think they should be investigated for this practice. There are plenty of great builders that do it right and are doing fine in the business. Why can't everyone just play fair and it wouldn't have to get to the point where the government gets involved.

Aug 03, 2010 06:41 PM #4
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