As the housing market continues its slump, one of the hardest hit segments of the economy has been the home builders. But, these folks may be more responsible for the demise of the real estate market than just overbuilding homes.
Many of these builders added mortgage loans and title services to their businesses. They created a one-stop shop for potential customers. While one-stop shopping may sound like a solid service for customers, it really wasn’t in this case. The builders would dazzle potential buyers with a beautiful home and then show them how they can fit this into their budget with creative financing. This is similar to how a car dealer shows you ways to put the car payment in your budget.
Once the builder showed the buyer how the mortgage is as cheap as their rent, they were sold. Never mind the fact that these loans contained teaser rates that exploded years down the road. The builder’s loan arm would tell folks to just refinance in a couple years when they have more equity in the home.
The problem with this arrangement is obvious. The consumer never had any interaction with any party that wasn’t serving the builder, and all the builder cares about is selling homes at the highest price possible. This isn’t to say that by bringing in a third party realtor or loan officer would have prevented these homes from being sold at top prices with shady loans, but it may have helped. An independent realtor working for the buyer may have negotiated a lower price for their client. A loan officer might have warned against using an exploding Adjustable Rate Mortgage (ARM). Of course, these parties didn’t show too much restraint during the boom, but it couldn’t have hurt.
If you are going to swim upstream to wealth, you need to ensure you have solid advice working for you. Always have outside parties involved in transactions, especially when it is the largest asset you will ever buy. Also, ensure you understand the motivation of your professional. Do they make commissions (meaning they need a sale for money), or do they charge an hourly rate (like a real estate attorney – usually money well spent when dealing with real estate). If you don’t understand how your professional is paid, you might not be getting good advice.