Wed 4 Oct 2006
Builder Closing Incentives: Read the Fine Print
Posted by anesia.springborn under Real Estate StrategiesLast week at one of my real estate closings, the title company was so busy servicing their fiscal year end closings that they had to bring in extra 3rd party notaries. This presented an interesting benefit in that the notary had no affiliation with the builder or the title company (who is owned by the builder). He could say anything innocently and not realize or care if it’s to anyone’s benefit or hindrance.
This brought to light one little bitty piece of fine print, or lack thereof.
You see, many times one of the incentives a builder will offer its buyers is a certain amount of money toward closing costs. I’ve seen $8,000 toward closing, $7,000, 2%, and other variations. Or sometimes the builder will offer a giant incentive, such as $60,000 that can be split and used part to cover closing costs and part to reduce the sales price. I like to use as little of my own money as possible, so I try to get as much of the out of pocket costs covered as I can, even if that means my purchase price and amount financed is slightly higher.
Last week I had two closings and I discovered a new fast one that slipped by me. The builder had offered $6,599 toward closing. I had assumed, as has happened in the past, that the builder would be paying $6,599 of MY closing costs. That’s why it’s an incentive and how it benefits me right? Well that isn’t quite what they meant. They meant they would pay $6,599 in closing costs, PERIOD. This $6,599 first covers THEIR closing costs, then any leftover covers MY closing costs.
Well it’s quite convenient that the builder owns the title company and it’s a money shuffle. The title company charges certain fees that I just can’t live with, like an email fee (they never emailed me anything). Any fees whatsoever could be inflated, invented, etc. and put on the HUD-1 as a closing cost and I couldn’t refute it because I technically wasn’t paying for it. In this case the seller/builder was paying for it on paper.
Here I’m thinking that the seller is going to pay all of the fees that the seller customarily pays. I’m expecting those fees to be paid as they always are. Then I’m expecting the HUD-1 to total up all of the fees that are customarily paid by the buyer (me). And then I’m expecting a deduction off of my bottom line of $6,599.
The HUD-1 was not presented this way. The HUD-1 had exactly $6,599 in fees in the column that shows what the seller is paying. Then the balance of all the rest of the closing fees were in my column. When I asked the notary to show me the line item with my $6,599 deduction, he matter of factly pointed out to me that if we added up all of the seller’s fees, this would be the total. We took an adding machine out and added it up, and this was indeed the case. I asked the notary to show me where the seller’s closing costs were. The seller truly was not paying any closing costs of their own. They were using my incentive to pay their closing costs. Their closing costs were effectively shifted into my column and I was paying them.
So if there is a next time for me, at the time of contract signing, I’m going to clarify what closing costs will be paid for by the seller, and that the incentive will be used to cover my closing costs only. Or at least I will try. In recent days the builders are being a little more flexible at contract signing time and may be willing to do this for the one in a thousand customer who asks for it.
6 Responses to “Builder Closing Incentives: Read the Fine Print”
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October 4th, 2006 at 1:01 pm
They always find a way to stick it to ya. Buying a house from a builder shouldn’t be a war but it certainly feels like it.
October 4th, 2006 at 1:35 pm
After I read your article I called up my builder and asked them about my fees for the December closing!
Essentially, the fees are mostly from the loan process. They do want me to pay for title insurance.
What seller fees added up to $6500???
October 4th, 2006 at 2:11 pm
bginvestor: You’re right, most of the fees are from the loan process. BTW don’t let those eat you alive either! The builder probably owns the lender and that can be a free for all as well.
If you have a closing incentive, you want to find out what closing costs the seller/builder would be paying even if there wasn’t an incentive. Set that number aside and remember it. Then at closing, you want to see that the seller is paying YOUR closing costs in the amount of the incentive, in addition to their own closing costs. In AZ your closing costs total will be about 2.5% of your purchase price. This includes the lending fees, title fees, impounds, everything.
You want to benefit from the entire closing costs incentive. Whatever amount they agreed to give you, you want taken off the bottom line of your roughly 2.5% fees.
It may be too late already but you want to try to avoid what they just did to me. They used a portion of “my” incentive to pay their closing costs. I’m fuzzy at the moment on how much their normal closing costs should be. I’ll have to look back through some HUD-1s to see what the seller typically has paid in my other purchases. I know they at least pay something. I would suggest you ask your loan officer sometime before closing to give you a list of the closing fees that the seller will be paying. Try to keep the dollar amounts out of it for now - just have him itemize “what” the seller pays for.
October 5th, 2006 at 10:33 am
I usually figure closing costs to be around $4k. So a $6k incentive should cover closing and buy down 1/2-3/4pts.
Another think to watch is that I had a builder give me $5k in closing costs. But instead they upped the price of the home $5k and said builder pays for all closing costs. Well closing costs came out to $3,500 and guess what, the price of the house was still $5k higher. I said “no way” I want that $1,500 back and they gave it to me. But the point is I had to ask for it.
October 5th, 2006 at 11:59 am
Hi Anesia,
Thanks for the response. Yes, this builder DR Horton uses a particular mortgage company. The incentive was to have 22k which some could go to closing costs. I chose to apply it to the bottomline and I will come in with some cash to pay closing costs. Hopefully, this make the numbers more straight forward, however I will keep a close eye on these guys.
Actually, I’m more worried about the interest rate that I am going to get. I have to use this company to get the incentive. It will be disturbing if their rate is .5 points higher than the competition! I am going through a re-fi with a good broker right now and already know that I will be asking for some relief on those closing costs. If the rates are too unreasonable, I will push back.
Great blog. Take care.
November 13th, 2006 at 2:06 pm
Hey, has anyone else heard of this new builder incentive called Pictured Home, my builder offers this service. Pictured Home is going to take digital 360 pictures of my new home during the entire construction process. I can log into my own personal account at picturedhome.com to view the photos.
Other cool things are you can store information about your home’s flooring, paint color, trim work on the website. I have two kids and I am constantly painting spots where they write on the walls with their crayons. Now I can store the manufacturer and color code of the paint, so I can find it easily at my hardware store.
Also, Pictured Home can capture an entire inventory of your home’s valuables for insurance purposes. A couple years ago, my home was flooded and I had to replace my big screen TV but I lost the receipt and didn’t have a photo of the TV. I fought with my insurance company for months to get them to cover the cost of the TV.
I’ll post an update when I receive my first set of photos.