Builder Incentives with Strings Attached?

Just say no to builder incentives with strings attached

By Kenneth R. Harney
Syndicated Columnist

One of the federal government’s top housing officials has this practical advice for anyone negotiating with a builder to buy a new house: You can always say no.

When the builder dangles thousands of dollars of “free” upgrades or closing-cost discounts in front of you if you’ll agree to use the builder’s affiliated mortgage lender — and threatens to withhold those incentives if you get your loan elsewhere — you don’t have to roll over and play dead. As Brian Montgomery, federal housing commissioner, puts it: “Often, consumers feel compelled to use a builder’s hand-picked mortgage company because they feel they’ve been offered an incentive they can’t refuse.”

But federal real-estate settlement rules “require that these incentives be legitimate and not built into the price of the house or the cost of the loan.”

In other words, builders cannot tempt you with illusory benefits — alleged discounts that you’re actually paying for somewhere else in the deal.

Montgomery was commenting on reports of consumers being forced — or feeling compelled — to sign on with a builder’s mortgage company even when competing loan offers from unaffiliated brokers or banks were far superior.

In one case described by Marc Savitt, head of the National Association of Mortgage Brokers’ consumer-protection subcommittee, a major builder in Arizona told buyers that they could not buy a house in a desirable subdivision unless they used the builder’s affiliated lender. The buyers, who had deposited $11,000 and signed a contract for the property, found the in-house lender’s rate a full percentage point higher than competing quotes from independent lenders.

The buyers decided to sign up with the independent broker offering the best rate and fees. The builder retaliated by refusing to participate in the closing, pocketing the $11,000 good-faith deposit, canceling the contract and threatening to sell the house to another buyer.

Although federal officials declined to discuss the case, Savitt says Montgomery’s real-estate settlement staff quietly intervened and persuaded the builder to put the $11,000 back on the table, proceed with the sale and even contribute $3,800 to “buy down” the buyer’s interest rate.

In a case in Tennessee, Memphis mortgage broker Roseann Sullivan says a builder offered one of her clients a $3,000 rebate off closing costs if the client agreed to go with the builder’s wholly owned mortgage company. The buyer “figured that nobody else is offering me $3,000 in cash, so why not?” Sullivan recounted.

Then the builder’s mortgage company pulled a bait-and-switch maneuver. It informed the client that after a second review of her credit history, underwriters concluded that she only qualified for a high-cost interest-rate package. The buyer’s near-700 FICO scores, however, actually qualified her for market-rate mortgage money.

Sullivan says she sees this “all the time.”

“Builders think they can play games with people because buyers are in such an emotional state,” she said — they don’t want to lose the house and they’re willing to believe that they really are getting a discount or rebate.

Savitt, who for more than a year has urged federal and state officials to police builder incentives, says antitrust and unfair-trade-practice issues also are involved.

According to the Federal Trade Commission’s Web site (www.ftc.gov), “tie-in sales” may violate federal antitrust law: “The sale of one product on condition that a customer purchase a second product, which the customer may not want or can buy elsewhere at a lower price, is a tie-in. Requirements like these are illegal if they harm competition.”

Savitt and other mortgage brokers argue that when a builder links an upgrade or closing-cost rebate to the required use of its affiliated lender, that fits the definition of a tie-in.

And when the tied-in mortgage is at a higher cost than others available in the marketplace, preventing the customer from choosing the lower-cost competing alternative, that fits the definition of “harming competition.”

“You become their captive, and there appear to be huge disincentives for you if you choose to get your loan elsewhere, even if it’s cheaper,” Savitt said.

Bottom line here for you? Listen to Montgomery: As a homebuyer, you cannot be compelled to use the builder’s lender. You can be enticed. You can be wheedled. You can be attracted by the builder’s incentives, which may be entirely legitimate and a great deal.

But you should also shop around vigorously and see what other lenders or brokers have to offer. Nobody can stop you.

Kenneth R. Harney: kenharney@earthlink.net

Why We Love Beacon Hill

Neighborhood gem Beacon Hill right next to heart of city

By Lisa Chiu
Special to The Seattle Times

Sitting so close to downtown, it still surprises residents of Beacon Hill that their neighborhood is as overlooked as it is.

When Oscar Castro moved to Beacon Hill 13 years ago, he was shocked to find that in Seattle, of all places, there wasn’t a single neighborhood coffee shop. The closest thing was the Texaco station on Beacon Avenue South, near the area’s north end.

Tired of going to a gas station for a cup of Joe, Castro, with his brother Luis Castro and Tim Prichard opened Java Love nearby. Since then, a few more small cafes now dot the landscape, but it still has that away-from-the-city feel.

Residents stroll the sidewalks, parents bring kids to Jefferson Park, and such stores as the Red Apple supermarket or MacPherson’s Fruit and Produce stand provide popular neighborhood anchors.

Beacon Hill’s seemingly slow pace may change, and quickly, once Sound Transit’s Beacon Hill station for the light-rail system is completed in three years at Beacon Avenue South and South Lander Street.

“It’s going to be discovered. In 10 years it will be unrecognizable,” Prichard said. “Once the rail station is open it will go condo crazy.” As Castro puts it: “It’s black gold waiting to be had.”

Beacon Hill is bordered by Interstate 90 to the north, Rainier Avenue South and Martin Luther King Jr. Way South to the east and Interstate 5 to the west. It stretches nearly to Tukwila, but the Beacon Hill Chamber of Commerce puts the neighborhood’s southern boundary at South Myrtle Street.

At the north end sits the historic former U.S. Marine Hospital, built in 1934. The art-deco building now houses the Pacific Medical Center and the headquarters of Amazon.com.

The shops along Beacon Avenue South are diverse and include Asian video stores, a yoga studio, Mexican restaurants and the Beacon Hill Pub.

The neighborhood is one of the city’s oldest. It was named after Beacon Hill in Boston by financier M. Harwood Young, who came to Seattle from Boston in the late 1800s.

Since then, it’s long been home to waves of immigrants. For years, Italian immigrants ran bakeries, restaurants and shoe shops along Beacon Avenue South.

By the 1950s, the neighborhood was predominately Asian American, and that group still makes up more than half the neighborhood’s population.

In recent years there has been a growing Latin American, African American and African immigrant population as well.

“It’s really diverse. We’re a mixed bunch of cookies here,” said Brent Moore, a Seattle police officer who has lived in Beacon Hill for 10 years and brought his son to Jefferson Park to play.

Moore’s wife is of Japanese descent and he is African American. He’s proud of his ethnically diverse neighborhood where residents speak a variety of languages.

The residential architecture is a mix of classic box homes, Craftsman bungalows, apartments and town homes.

When Moore bought his home 10 years ago, it cost $170,000. The median price of a home in the area sold for $327,500 last month, up 13 percent from the year before, according to the Northwest Multiple Listing Service.

“I love it, it’s central. You can get anywhere you have to in the city,” Moore said.

Moore’s neighbor, Todd Lefkowicz, said he loves how friendly everyone is. When he moved to Beacon Hill four years ago, he was busy digging in his front yard when Moore approached him and asked if he needed any help.

“He showed up a half-hour later with a shovel and we were digging up dirt together,” Lefkowicz recalls.

“You hear about the ‘Seattle chill’ where people aren’t so friendly — I really don’t feel it here.”

For First Time Home Buyers

Buying a home for the first time can be scary, but as with anything else in life, the right preparation can bring about good results. Remember: The right home for you is one you want and can afford.

Here are some tips for first-time buyers:
“Ask yourself if you’re ready. You need to decide whether you’re financially ready to buy a home,” says Connie Barbosa, vice president and branch manager of Slade’s Ferry Bank in Somerset, Mass. She suggests that first-time buyers ask themselves some simple questions:

• Do you have a steady job and income?
• Do you plan to stay in the same area for a few years?
• Do you have enough money set aside for your down payment and closing costs?
• Do you have an emergency fund?
• Do you live within your means, avoiding credit-card debt?

“Another consideration is whether you’re mentally prepared for the responsibility,” says Charles Glass, a real-estate agent in the Washington, D.C.-Maryland market.

“A first-time home buyer is probably used to renting,” Glass says. “They’ve got to get used to budgeting a little differently in terms of having a reserve when things go wrong. And whether it’s a new home or an old one, things will go wrong. Experienced homeowners know this. First-time buyers don’t.”

Find out what you can afford. When you’re sure you have the right mindset to be a homeowner, it’s time to determine how much house you can afford. Probably the best way to do that is to get pre-qualified for a loan. Some agents won’t work with someone who isn’t pre-qualified.

There are three options for pre-qualifying: go to a lender with whom you have already established rapport, find a real-estate agent you trust and follow the agent’s recommendations for a lender, or research lenders online.
Glass says the first option is the best because “if you’ve built a relationship with a lender, they will go to extra lengths to make sure they qualify you for the loan.”
Your total monthly mortgage payment — principal, interest, taxes and insurance (or PITI) — should not exceed 32 percent of your monthly gross income, Barbosa says. The U.S. Department of Housing and Urban Development (HUD) suggests that figure should be 29 percent. So this is not an exact science. You can calculate a ballpark figure from this information, but then talk to your lender to get a better feel for how much flexibility you might have with different lending arrangements.
Remember, the bigger the down payment, the less you’re borrowing, and the less expensive your mortgage will be in the long run. HUD offers programs to help first-time buyers, too.

— Salvatore Caputo, Bankrate.com

Capitol Hill

— From Seattle Times news researcher Miyoko Wolf:

Real-estate values on Capitol Hill have climbed in recent years.
The median price of a home (single-family and condominium) in the part of Seattle that includes Capitol Hill was $415,000 in April, up 18.4 percent over the past year, according to figures compiled by the Northwest Multiple Listing Service. And many houses on Capitol Hill go for more than $1 million.
Capitol Hill is a unique, urban neighborhood that real-estate agent Marlow Harris describes as having “incredible diversity.”
“You go from gritty urban trendy/cool lofts to glorious turn-of-the-century mansions on tree-lined streets,” Marlow said. “There are artists, musicians, software designers and others involved in the creative fields drinking lattes side-by-side with hip urban families with children.”
Gabriel Stromberg is a freelance illustrator and graphic designer who moved to Capitol Hill from New York City four years ago.
He’s also part of an artist’s collective called No Space, which hosts shows for all types of artists — and helps to create a sense of community.
“Just walking to go get coffee, you meet like 15 people you know,” said Stromberg, who is on a first-name basis with the staff at nearby coffee shops.
Stromberg walks or takes the bus other places and said he likes the fact that you don’t have to have a car because it forces people to say “hello” to each other.
Alex Ward moved to Capitol Hill in order to walk to work downtown, but his plans don’t include buying a house on Capitol Hill.
Last year, the city raised the height limit along the street from 40 feet to 65 feet and created design guidelines so that new buildings would fit into the neighborhood.
Now, a development company plans to build a six-story building with condos above and businesses at the street level at East Mercer Street and Broadway.
Two projects are under construction at Broadway and East John Street, and Broadway and East Pine Street.
Copyright © 2006 The Seattle Times Company