Mortgage Solutions That Increase Home Sales
In challenging economic times, smart business people often look to alternate revenue streams to bolster their business. Even smarter people look for alternate sources that will not only provide economic rewards, but can also help attract prospects and create more satisfied customers.
For home builders, especially small- and medium-sized builders, mortgage alliances, if structured properly, can not only provide a new source of revenue, they can also be a valuable tool for prospective home buyers.
In light of current conditions, perhaps now more than ever, builders need to explore every option available in order to maintain or increase their market share. Clearly, we need to be open to new and creative marketing tools that we may not have considered in the past.
It’s Not Size, But Knowledge That Matters Most
Caution, of course, must be exercised in your search for the ideal lending partner. We have all seen the collapse of many of our larger mortgage providers this year, and size alone, should not be a determining factor.
Don't overlook your local and regional lenders, but understand their motivations, too. Just as you are looking for ways in which to weather the storm, lenders of all shapes and sizes are beating a path to your door to help increase their own production to prevent themselves from becoming the next casualty.
Know your prospective partner and understand that while some have tools that will help you grow your business, many others have self-serving motives behind their approach.
Be Prudent, But Open to New Ideas
Prudence is the watchword, but don’t let it prevent you from taking advantage of mortgage solutions sooner, rather than later. This is very important as we head into the winter months.
Be open to new ideas using financing incentives to drive your business and you will find that your business will not just be “holding on,” sales and the number of satisfied new home buyers will actually increase.
Customer Satisfaction, Financial Rewards, Stronger Competitiveness
There are four key reasons why small- to mid-sized builders should consider a mortgage alliance. Builders can:
- Get better control over the customer’s mortgage process and reduce unpleasant surprises for the consumer and for yourself.
- Develop financing incentives to make homes more affordable and to attract and qualify a broader range of consumers.
- Compete with the integrated financing programs of the national builders.
- Share in the economic rewards of the relationship.
A mortgage alliance provides the builder with the ability to coordinate the administration and closing functions for most of their borrowers. This results in on-time settlements and fewer hassles and delays during the construction process.
Further, an effective mortgage alliance can be designed so it can help builders develop special financing incentives that enable them to sell more homes.
Learn From the Auto Industry — It’s About Monthly Payments
In today's market, we have found out something that the automobile industry learned long ago ― consumers are concerned about their monthly payments.
Incentives aimed at lowering the monthly mortgage payment are very helpful in bringing in new customers. Special financing options allow you to make homes more affordable to a broader range of home buyers.
For years, the large, national production builders have utilized financing incentives to put more people in their homes. Now, with your own mortgage alliance, you will be able to compete effectively for the pool of prospective home buyers in the market today.
Choose a Partnership That Meets Your Needs
So how do you decide who to partner with? Moreover, what part will you play in the actual design of the business relationship?
There are four forms of alliances — desk/space rental agreements, marketing services agreements, joint venture mortgage companies and wholly owned in-house mortgage companies — operating in the marketplace today. Each will be assessed so you can select the structure that best meet your needs and those of your customers.
Desk Rental/Space Rental Agreements
Just as the name implies, desk rental agreements (DRAs) or space rental agreements (SRAs) typically call for the lender to “rent” either a desk or similar space from you that is usually located in your office or model home site.
With DRAs and SRAs, the lender’s loan officer is available to pre-qualify and order credit reports on prospective home buyers.
This form of alliance is relatively easy to create. Be aware, however, that it does not yield significant revenue streams to the builder — usually less than $500 a month.
Also, one note of caution about how much rent you can charge the lender in this type of partnership. RESPA regulations stipulate that the amount of rent paid does not exceed fair market rent for the space. If the rent paid is more than what the lender would pay for rent in a standalone operation, then chances are you could find yourself the target of a RESPA investigation.
Marketing Service Agreements
Marketing services agreements (MSAs) often grow out of space rental agreements.
With an MSA, the lender contracts with the home builder to provide marketing services. To be a qualified MSA, the builder is often required to perform specific services on behalf of the lender.
Such services include, but are not limited to:
- Allowing the lender’s loan officers to distribute materials to the home builder’s sales agents
- Allowing the lender’s loan officers to conduct sales meetings for the home builder’s sales agents
- Placing the lender’s logo on the home builder’s Web site
- Designating the lender as a preferred lender on the home builder’s Web site
- Placing the lender’s signs and banners in model homes
You should also examine how your MSA will be fulfilled.
Many national lenders use MSAs to generate additional volume for weaker loan officers who often pay for the MSA out of their commission streams.
If you pursue an MSA, be certain that the lender and the loan officer are committed to helping you grow your business.
Joint Venture Mortgage Company
Many lenders today are offering to form joint venture mortgage companies with home builders in order to capture significant amounts of business.
While this type of a joint venture can take different forms depending upon the lender, it is a separate entity capitalized by both the lender and the home builder.
In this type of arrangement, the new company hires its own loan officers and, for a predetermined fee, outsources the processing, underwriting and closing functions to the lender partner.
As the builder, you should participate in the design and implementation of the mortgage solution.
Most large lenders have a “canned,” off-the-shelf packages with set rules and regulations. Before entering into any multi-series LLC, be sure to check with your legal counsel to ensure that you are not exposing your home building company to undue risks.
By entering into a “tailor-made” joint venture, you and your lender partner can design and set the parameters so that your risk is minimized.
When reviewing the lender joint venture agreement, be sure to review all the covenants of the agreement. For example, many agreements require that builders pay large penalties if they wish to dissolve the relationship. This is a clause probably worth negotiating.
Further, make sure that you have an equal voice in determining personnel, staffing and loan fulfillment options. If you are not entirely happy with the agreement, negotiate changes before you sign the documents. Also, have your legal counsel thoroughly review the agreement before you sign.
While a new joint venture company should provide an additional revenue stream, be sure that it is designed to help you increase the sales of new homes, too.
A carefully crafted joint venture will help you create special incentives to drive more sales. Ask your lender partner about incentives used in their other joint ventures. And, absolutely, ask to speak with home builders who are already in partnership with your considered lender to hear an unbiased assessment of their relationships.
Wholly Owned In-House Mortgage Company
A fourth option to consider is forming your own in-house mortgage company.
Our review of this type of entity suggests that while some large home builders have been successful with this business model, many have failed.
Creating your own mortgage company poses many risks and costs not associated with the other lending alternatives. These include:
- Significant capital and reserve requirements
- Need for highly skilled/highly compensable mortgage banking professionals
- Increased regulatory oversight by federal and state agencies
- Re-purchase risk on defaulted loans
- Loss of focus on the core business, building homes
No doubt, you have seen the adverse media coverage about wholly-owned mortgage companies and regulatory and accounting irregularities. Now may not be the time to be thinking about developing your own in-house mortgage company.
Some large home builders have enjoyed success with their own mortgage companies while others have dissolved their mortgage operations and entered into joint venture mortgage companies with preferred lenders.
Still others are facing challenging legal battles with regulators and consumer groups.
The Partnership Must Complement Your Sales Strategy
An important factor in your mortgage affiliation selection process is whether or not you employ "in-house" sales associates or you utilize real estate companies to list and sell your homes.
Be sure that if you are using a real estate company they understand the importance of your mortgage relationship. Realtors® have their own mortgage partnership with whom they like to refer clients.
If you are using "in house" sales associates, involve them in selecting a loan officer and make sure they understand that your lender partner is there to design and create ways in which they ― and you — can sell more homes.
In these uncertain times, being fully engaged in determining a lending solution to increase sales will provide you with more control over the future of your business.
Jim Nelson is the senior vice president of American Home Bank in Mountville Pa. For more information, e-mail Nelson, call him a t717-314-5144, or visit www.builderstotalcontrol.com.
NAHB Has More Than 300 Resources to Help You Run Your Business More Profitably
Go to NAHB's Business Management Tools Web pages (available to members only) for instant access to more than 300 timesaving, moneymaking and cost-cutting business resources to help you run your business more profitably. Get guidance on accounting and financial management, business strategy, computers and information technology, customer service, human resources and more.
Resources are added weekly, so bookmark www.nahb.org/biztools to go directly to these vital business management resources.
Local and state home builders associations can link directly to www.nahb.org/biztools from their Web site and give their members instant access to these resources. It will make your HBA's Web site the place to go for the information and guidance that members need to succeed.
Build a Profitable Relationship
Builders can learn how to profit from alliances with brokers by taking the “Increased Profits Through Effective Builder-Broker Cooperation” course from The NAHB University of Housing.
The course shows how to use common interests to connect with brokers and how to choose compatible sales professionals.
To find out where upcoming courses are being held, click here, or call 800-368-5242 x8154 for more information.