by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
If you are reading this, you are probably a real estate agent or broker. Most of the people who read Bloodhound Blog are industry folks rather than consumers. Consumers DO read Bloodhound Blog but, all in all, our audience is mostly comprised of the industry grunts who show or list homes and write contracts. Thus, I write this so that you, the agent or broker, adequately understands how much you are costing your buyers when you shorten the appraisal and loan contingencies on a contract.
You, as an agent, want a smooth escrow. You want the inspector to come out immediately so that you can negotiate the repairs request within a week, You probably wouldn’t trade your most scrupulous and detailed inspector for the least busy one to satisfy your buyer’s shortened disclosures contingency– you beg, plead, and cajole your best inspector to help you because repairs are a tangible cost; you can see, touch, and (sometimes) smell them. The home inspection, and negotiated repairs, is how you might be judged by the buyer.
“But wait!”, you say. “We may recommend three home inspection companies but, ultimately, the buyer makes that choice”
Relax. You covered your butt with that disclosure but, in a transaction with shortened contingencies, the wink and nudge is going to produce your desired result, For most agents, that is less stress when contingencies are due. If J. Christ, GRI were an agent, He might renegotiate the inspection contingency time frame to get the most fastidious inspector but we know that He is perfect and we are flawed. As long as you disclose that you may be compromising quality for speed to your buyers, you are doing your job.
Very few agents I know realize that they do the same thing to their buyers when they recommend more expensive lenders to meet the appraisal and loan contingencies. Like most businesses, there is an inverse relationship between price and service in the mortgage lending business; it’s even more pronounced now in this high volume, low rate environment.
Our family business has licenses to sell and/or finance real estate; I have done both in the past 25 years. Mortgage brokers have access to all kinds of lenders so I can compare loan pricing to service levels in about 90 seconds when a contract comes in. Let me illustrate this for you with a recent transaction:
$600,000 conventional purchase, $480,000 loan, 30 day escrow, 7-day inspection contingency, 10 day appraisal contingency, 14 day loan contingency (the default contingencies on a CAR Residential Purchase Agreement are: 17-day inspection contingency, 17 day appraisal contingency, and 21-day loan contingency).
What then, is the “cost” of shortening the loan and appraisal contingencies?
The appraisal contingency is an easy calculation. Most appraisal management companies will guarantee a shortened delivery time for an extra fee, usually around $350-400 . Let’s call that extra cost $350. Selection of the underwriting and funding lender however, is where the real extra costs are incurred. Here are the results of a lender search, at 2.625% rate, on the day the contract is executed and the terms need to be locked:
Lender A has an underwriting period of 28 days– no lender discount fees (points) at all.
Lender B has an underwriting period of 17 days– lender discount fees are $450
Lender C has an underwriting period of 10 days– lender discount fees are $2600
Lender D has an underwriting period of 3 days– lender discount fees are $3600
If you assume that the processing time is 3-4 days (it is), you analyze it this way” Lender A never would have been a consideration. Lender B would have met the default contingency period (21 days) but is won’t meet the shortened contingency period– we will use Lender B then as the baseline. Lender C will probably get it done in time, provided that the escrow company and borrowers are on the ball. Lender D however, will cause you the least headache. In the agent’s perfect world, Lender D is the right choice because it, combined with the extra rush fee for the appraisal, gets the job done a few days before the appraisal and loan contingencies are due.
What did that cost your buyer? $350 for the appraisal rush fee and $3150 is extra discount fees, The shortened contingencies then, cost your buyer about $3500 extra in fees. That STILL may be a bargain if they saved $10,000 on the purchase price because they were able to beat out a higher offer by shortening contingencies…
A knowledgeable, ethical agent is able to discuss this concept intelligently. I already know that, if you read Bloodhound Blog, you are an ethical agent. Now you have the knowledge to disclose the “hidden” costs of shortened contingencies to your buyers.
P.S.– Some of you may feel compelled to comment “But MY direct lender offers speed AND price because…blah, blah, blah, blah”. You got sold well. Show this article to a local mortgage broker and have her run the numbers to see how much YOUR direct lender is costing your buyers.
P.P.S.– I have no doubt that a direct lender will challenge my results in the comments section with the same sales pitch they use on agents. Ask an agent to take us up on the pricing challenge on their next escrow. It won’t be pretty.
