Moral Hazard; The Bank Made Me Do It!

Lisa, thanks for commenting.  Let's take your beautiful center hall Colonial that's under contract (congrats on that!)  It was listed for $599,000. 

Here's a make believe scenario.

Seller is strapped because he bought another home.  He agrees to a contract price of $550,000. and, after negotiations, agrees to pay $6,000. of the buyer's closing costs on top of his price concession.  The seller feels pressured, and is not happy.

Buyer has $150,000 to put down because of an inheritance, but the buyer is also in a tight position financially, and his real worry is making the $2,495 P&I mortgage payment on a $400,000 mortgage.  Buyer is anxious because that's more than he's used to spending on a mortgage. 

The buyer's agent's lender buddy had quoted 6.375%, 30 year fixed, with 1/2 origination on the GFE.  Yield spread would fatten the broker check by another 1.5%, so she's looking at a gross commission of $8,000. before her split with her employer.  It's been a while since the Loan Officer has had a pay day.

Because the deal's so tight, the buyer's agent prevails on the loan officer to lock the loan closer to par, cutting the LO's commission in half because the yield spread has vanished.  The buyer's rate is now 6.125%  The payment is $2,430.

Buyer is still a little anxious, but the concession mollifys him.  You're happy to have put the deal together, finally.  The Seller is relieved to have what looks to be a solid contract.  The buyer's agent / loan officer relationship, however, is fraying at the edges, because the agent leaned on the Loan Officer to reduce her commission.  Hey, maybe you and the buyer's agent both gave up some of your commission, too.  That's life, right?  And there are a lot of loan officers out there who will take the business if this one won't play ball.

That's what's happening in todays market.  Here's a better scenario.  At an 80% (or less) loan to value, the seller can contribute up to 6% towards the buyer's costs, not that the seller wants to do that.  But he's willing to do something.  How that contribution money is spent makes all the difference in the world.

Rewind to the afternoon your seller agreed to accept the offer of $550,000, with a $6,000 contribution toward closing costs.  You put on your Advisor hat, and suggest the following

Let's counter to the buyers agent as follows:  "Contract price shall be $558,000.  Seller agrees to contribute up to, but no more than $8,000 to buy down the interest rate on the buyer;s purchase money mortgage, and will contribute an additional $4,000 towards the buyer's closing costs."  That little suggestion does many good things:

• The seller pockets an additional $2,000.  You get the credit!
• The buyer gets an interest rate of 5.75% to brag about to his friends.  Even though the loan amount is now $408,000, the P&I payment is $2,380.  Buyer is no longer anxious.
• Both agents get an improvement in their commission check.

(A bank won't go too low on the interest rate, because they have to pool loans and sell them on the secondary market. If you have a portfolio lender, though, you can go very low.  We did this for a foreign national and locked him at 4.5% for 30 years.  He thinks his realtor walks on water.  She had been in the business for all of 8 months!)

Lisa, this isn't a comment.  It's a post!

Mike in Tucson

Thanks, all, for commenting.  I can't keep up with you, but I'll come comment on your blogs.  We'll see what tomorrow brings.  Lisa, I did make the mega-comment into a post. 

Mike in Tucson

Elizabeth:  Thanks for your opinion! 

Mike:  He might be a reader; let's invite him to join Active Rain!

Mike in Tucson

Sarah:

You're most welcome!  Thank you for stopping by to visit and comment.

Mike in Tucson