Getting Fleeced For $37,000 & Being Convinced You Got A Great Deal

I recently missed out on an $800,000 transaction on the agent side of my business. This potential client was enticed by his bank with an offer to pay all of his closing costs if they used them as the lender, their preferred agent and title company. I casually mentioned to this potential client that I suspect that they were either raising their fees to then discount them, to create the appearance of savings, or doing some other hocus pocus to create the illusion of savings. Unfortunately I did not convince him, and he used this company to facilitate the transaction. I am listing his old home however.

After doing some more digging I found some details on the program that he used. The devil is always in the details. In this program, they will waive $10,000 in closing costs if they use their real estate agent, lender and title company to purchase a home. If they sell their home within 3 years, they must repay the $10,000 prorated over how long he held the property up to three years. I also found that part of that $10,000 was the waiving of the origination fee on the loan. The origination fee they waived was $6,400. Also I can logically deduce that since they would need to repay the $10,000 if they sold their home within the 3 years, that the closing costs are likely lender paid in the form of a higher interest rate. So deducing that he is likely paying an interest rate bump equivalent to $10,000 spread over the three years, means that if he held this new home for 7 years (The average time people stay in their homes) he will actually pay about $13,333 more in interest (the last half of 4 years if higher interest) than if he had just gone with a traditional mortgage broker who got them a market rate interest rate.

Combine this with the fact that his agent in the transaction was only able to negotiate a $9,900 discount off the list price of a home that had been on the market 45 days. The property in question needed all new siding, and much wood work on the exterior due to massive amounts of rot. I envision this would cost about $30,000. This damage was all easily visible to the naked eye. It is something that should have been brought up in the initial negotiations. So I have no doubt that he could have gotten at least another $15,000 off the eventual sales price.

Now if this client had used me to both buy his new more expensive home, and then sell his old home, I would have also discounted my listing fee. My typical listing fee is 6%, but I would have dropped it to 4% (2.5% to the buyer, 1.5% to my company) in order to secure both transactions. Also as an experienced agent, I would have known to try to get a copy of the old title policy on his new home so as to same him money by getting a reissue rate on his title insurance. So when all is said and done I think this buyer will be out an extra $37,000, but will come out thinking he got a great deal.

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The same thing happens often with new home builders. The agents selling new homes love when someone comes in without an agent, or with an inexperienced agent. They rob those retail buyers blind and then convince them what a great deal they got.

So this is my own fault of course. I am often too casual in my interactions with potential clients. I’ve done myself a disservice by missing out on a pretty good commission….but I’ve also done a disservice to this potential client since he will now have missed out on about $37,000 in savings. So the lesson here for agents is to get the numbers out in front of people. Inform and educate. The lesson for a consumer is not to be enticed by the promise of someone paying your closing costs. Look at the full range of numbers and really understand the deal. If something seems too good to be true, it just might be. This is why it is important to have working relationships with agents, lenders and title attorney that you can trust. Real estate is very much a relationship business. You need people you can trust to explain to you some of these complicated things if you are not used to dealing with them on a daily basis. My team cannot always beat the competitions prices….but we will at least be honest and say whether we can or not.