Texas Housing Insight: Beating The ‘Big Box’ Builders

Overcoming the heartbreak of losing clients to builder-preferred lenders

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Mortgage Advisor

Most of us are unfortunate enough to experience the heartbreaking loss of a client to a “big box” builder’s “preferred lender” and the frustration these situations bring. They offer tens of thousands of dollars in price reductions, paid closing costs, and rate buydowns that the average lenders or brokers can’t even come close to. I have seen great clients leave me at the altar when dazzled by these builder incentives. Some of these clients have been very close friends or people I spent months developing to get them to where they could be pre-approved. After having countless hours of hard work go down the drain and tens of thousands of dollars in hard-earned commissions slip through my fingertips, I had to change my mindset. If I wanted to beat these “preferred lenders” I first needed to understand how they operate. As the great Sun Tzu once said “To know your enemy, you must become your enemy”.

Who are these “big box” builders?

The Top 10 Builders by volume in America in 2023 according to Builderonline.com are listed to the right, in order from 1 ascending to 10:

Some of these have become household names (pun intended) and it’s no surprise considering this Top 10 list built a combined 276,941 closed units in 2022. Now just because these builders can slap some sticks together and throw some shingles in it doesn’t mean they are to be trusted or have quality craftsmanship.

According to Life Story, the chart below is the ranking of America’s Most Trusted Home Builders for 2023. As you can see these are the top 20 builders which rank from 5 Stars down to 2 Stars.

Are you surprised at the lower two-star ratings for some of the more familiar names like KB Homes, Lennar, Pulte, or D.R. Horton? As you can see the top three per unit builders are among the lowest rated from the list above, only three of the Top 10 per unit volume builders have a four or five-star rating and one of the builders has a three-star rating compared to the list above. So, what does this data tell us? I’ll leave you to unpack that.

These builders sometimes use pushy tactics to entice buyers to use their preferred lenders, but there is ALWAYS a cost. Let’s take a closer look at the pros and cons of using a home builder’s preferred lender.

Pros:

• Convenience: The homebuilder’s preferred lender will already be familiar with the builder’s process, so the loan application and home buying process may be smoother and more streamlined.

• Incentives: Preferred lenders often offer incentives, such as lowered purchase prices, closing cost assistance, or lower interest rates, which can save buyers money.

Cons:

• Limited Options: While the builder’s preferred lender may offer incentives, they may not necessarily be the best lender for buyers. By limiting buyers to the builder’s preferred lender, they may miss out on better rates and terms from competing lenders. Some preferred lenders don’t offer FHA or VA options to buyers and usually don’t have irregular income options like 1099, Bank Statement, or P&L loans.

• Higher Fees: The builder’s preferred lender may charge higher fees and closing costs than other lenders can add up quickly and be used to eat up those incentives.

• Poor Service: Often the preferred lender is cranking out loans beyond a manageable and sustainable volume. I’ve heard stories from buyers of the wrong loan type being set up, not even having a conversation with their Loan Officer, and receiving service that is just unacceptable in my opinion.

Every time I’ve lost one of these deals, within minutes, hours, or days, the phone rings with a new opportunity.

How can they offer these incentives?

It’s pretty simple actually. Often there is a corporate parent that owns the builder, the preferred lender, and the title company buyers are pressured to use or they have an affiliate business arrangement between these parties. They jack up the interest rates and fees, completely control their own market, and generate massive profits. Sure they shave a little off each side of the business to give the illusion of massive savings but it’s no different than them telling you the price of something costs $100, it’s only worth $50 and they give you $50 back.

This is nothing but a modern-day scam and, dare I say, a form of price fixing, which is illegal according to the Federal Trade Commission. We’re dealing with mega-corporations amid a housing inventory crisis in the US, so I don’t see this issue getting much attention on Capitol Hill any time soon.

So, how do we respond as professionals?

Let’s first talk about how to handle the client and the buyer’s agent. You’ll want to see the builder’s offer in writing to read the “fine print.” If you’ve provided good service to your client this should be easy for you to obtain. You can read through the offer to see if anything tricky or sticky stands out. I ask myself, “Would I personally take this deal?” If the answer is yes and you can’t compete, it’s time to let it go gracefully. I usually reach out to the buyer’s agent first. If they aren’t already aware, which they usually are, I inform them. I congratulate them, let them know I understand they are doing what they think is best for their buyer, and let them know we can make it up on the next one. I then call my client and congratulate them. I tell them that I’d be a bad advisor if I didn’t tell them to take advantage of these incentives, I’m happy to review any documents, and I will keep their file open in case something goes sideways. In turn, I ask for them to please let me know when they close so I can close out their file. I may not be their loan officer on this transaction, but I’m still their mortgage advisor for life. I thank them for the opportunity and double down on asking for referrals to make up for the time, effort, and care put into them. Most people will genuinely appreciate this approach and it could very well turn into more business for you in the future.

Now let’s talk about taking a page out of their book. Not all builders are mega-corporations and all builders should have a preferred lender. I have personally leveraged my correspondent programs to offer Builder Preferred Lender Programs to help boutique, costume, and luxury builders better market their homes. I offer up to a $10,000 lender credit (tiered out based on the loan amount) to be used for a rate buydown and/or closing costs. Not a $10,000 lender credit has to be a pretty significant loan amount. Guess what? This is 100% compliant and legal. This approach has earned me relationships, trust, and connections with a whole new group of potential clients and has referral sources. Not only does this open up potential commercial business opportunities with these builders but also access to higher-end realtors, clients, and loan amounts with extremely high commission payouts. I’m currently the preferred lender in a $3.3M listing, a $1.7M listing, and a $1.3m listing. I have personal loans in processing for three of my builders and have received several referrals from my builder’s preferred realtors. You know what they say. If you can’t beat them, join them!

At the end of the day, nothing can take away the sting of hard work and potential commissions wasted. It’s important to embrace the emotions that come along with these losses. My rule when this happens is to get angry. I get mad! But I only allow myself to feel those emotions for five minutes. Then I move on. Every time I’ve lost one of these deals, within minutes, hours, or days, the phone rings with a new opportunity. Turn those negative emotions into productive energy. Get creative and learn to play their game, but play it your way.