Locally here in Tampa Bay there is a well known mortgage broker who is often seen on TV and heard on radio claiming “I’ll pay your closing costs!” It sounds too good to be true, right?
Let’s remember that nothing in life is ever free and that you generally get what you pay for. Any time we are experiencing a “hot” real estate market you start seeing various real estate marketing ploys like this coming out of the woodwork. There are several that come to mind actually.
What’s the catch with the “I’ll Pay Your Closing Costs”? How does the lender make money?
First, you have to use their real estate agent to purchase your home. Why? This is another profit center for the broker. Generally buyer’s agents are offered a commission for “cooperating” with the listing agent in our MLS system. The broker in this case pockets that commission and pays his own licensed agents a small salary. That’s his first source of profit.
Secondly – he is not paying your closing costs out of the goodness of his heart. Let’s be real – he is in business to make money. He can likely pay your closing costs because his rates are slightly higher than another mortgage lenders might be, and may be charging additional fees in the loan as well. Consider that if the interest rate is 1/4% higher over the life of a 30 year mortgage, this WELL exceeds a few thousand that may be paid out in closing costs. 2nd source of income. When you are comparing mortgage lenders, be sure to ask for a costs breakdown and amortization schedule so you can see all of the fees you will be paying and do a true comparison.
3rd source is that he is not a direct lender and likely sells the loan to another bank such as Wells Fargo or Bank of America. This happens commonly with mortgage brokers, and there is nothing wrong with it – your terms stay the same – but he is making a profit also when he sells the loan. 3rd source of income.
The 4th is – can you guess? Title insurance. Yep, he’s also in the title business and bundles his services together with the advertisement of a one stop shop – and again – fees here may be slightly higher than another company’s fees.
I had the opportunity to talk about this a bit recently on Bay News 9:
Let’s go back for a moment to the 1st source of income. You must use their real estate agents. You may already have a real estate agent you like, but to qualify for paid closing costs, you have to use theirs. What do you know about this agent? How long have they been in the business? How many transactions have they done? What is their ratio for percentage of list price? What kind of negotiator are they?
These agents are paid a salary. Most agents I know wouldn’t consider this set up because we make more as independent contractors earning commissions on what we sell. So who would likely take a salaried job in real estate? Perhaps someone who is brand new or hasn’t sold much and just wants a steady stream of buyers who are ready to go?
My concern for the consumer in that scenario is that they may actually not have a strong negotiator on their side and this is, for most people, their largest financial asset they are purchasing. The difference between a great negotiator and a not-so-great one could be tens of thousands of dollars. So why would you want just anyone representing you?
For more real estate marketing schemes uncovered, check out my YouTube channel for my interviews on Bay News 9.