Price is king, but these extras also might catch a buyer’s attention

“Serious buyers are looking for a place to buy a home, not a trip to Tahiti,” said Dave Ledebuhr, owner/broker of Musselman Realty in East Lansing, Mich. On top of that, lenders are leery of gimmicky incentives, fearing that they’re built into the price of the home and that loan dollars are being used to pay for that tropical trip, he added.

Instead, effective incentives get to the heart of what’s on the minds of potential buyers — the overall cost of the home and the monthly payments they’ll have to manage, he said.

Help in bringing down the interest rate of the mortgage for a year or two by paying points, for example, can go a long way in giving one home an advantage over another, said Dave Dalzell, owner/broker of Dalzell, Realtors in Abilene, Texas. Contributions to the down payment and common closing costs could especially be of help to a first-time home buyer, said Greg Zadel, owner of Zadel Realty in Firestone, Colo.

Incentives can be considered when the home is first listed as a way to distinguish it from the start, Dalzell said. They can also be added when the home hasn’t sold in two or three months as a way of enticing a buyer without lowering the cost. Or incentives could arise in negotiations, when a buyer needs that one extra little nudge to commit.

Make no mistake, the location and condition of a home are going to be its main selling points. But if sellers “put on their buyer’s cap” and really consider what issues the buyer might have, it could make all the difference, Dalzell said.

“I tell my seller to look at his bottom line,” said Susan Ramsey, a Realtor with Re/Max Integrity Realtors in the Phoenix area. A seller should figure how low he or she is willing to go, factoring in both the selling price and other incentives used to get a buyer to commit.

But also be aware that most seller concessions need to be disclosed. “Everything should be in writing and attached to the contract,” Dalzell added.

In addition, buyers and sellers need to make sure that they don’t exceed the lender’s allowable seller-paid assistance, Ledebuhr said.

Below are six of the most common incentives being used in markets today:

1. Reducing the price

A price reduction might be the most common buyer incentive, and often it is the one that is looked at first, said Delores Conway, director of the Casden Forecast at the University of Southern California’s Lusk Center for Real Estate.

“The price is something that is a common currency — it appeals to everybody,” she said.

Gene Rivers, who owns four Keller Williams offices in Florida, agreed. If a buyer has in her mind that she’ll pay $350,000 for a home and the seller won’t budge from $375,000, “$5,000 in closing costs and a plasma TV ain’t going to get it done,” he said.

But those extra little perks can grab the attention of a buyer; it also might inspire a commitment from someone on the fence between two similarly priced properties, Dalzell said.

“What we usually recommend before you reduce the price … think about what you can do with the same dollars in an incentive,” Dalzell said.

2. Paying points

Sellers can offer to pay mortgage points for a buyer, an incentive that Dalzell tends to use in environments like today’s, when rising interest rates are at the front of a buyer’s mind. One point is 1% of the loan amount, charged as prepaid interest.

For example, instead of having an interest rate at, say, 6.5%, a seller might be able to pay points so that the rate is at 4.5% for the first year, Dalzell said.

“When a buyer sees a lower interest rate or monthly payment, that’s something they can relate to,” he said. The setup makes sense for a buyer who has furnishings to buy for the new place; it also can make for an easier monthly-payment transition for families that are upsizing.

A word of caution to buyers considering this tactic, however: This assistance doesn’t last forever and usually spans about one to three years. Before accepting, understand and plan for the point in time when the window closes and payments return to their normal levels.

3. Down-payment aid

For some buyers, the hardest part of entering the ranks of homeownership is the down payment — also an area where a seller can help. It’s mostly first-time home buyers interested in this kind of assistance because they’re often the ones lacking in funds to complete a deal, Zadel said.

“It gets people into homeownership,” he said. “The disadvantage is that the buyer is financing that additional amount,” he added, because a seller would likely come down in the price of the home if a chunk weren’t dedicated to down-payment assistance.

4. Help with closing costs

Closing costs include items ranging from taxes to title insurance and can add up, ranging between 2% and 7% of the loan value, according to Freddie Mac. So many buyers, especially those stretching to make a down payment, will be interested in having a seller help out.

In Phoenix, buyers in every price range have been asking that these costs be covered, according to Ramsey. “They ask for it because they know that they’ll get it,” she said.

5. Adding a home warranty

A residential service contract is sometimes thrown in as an incentive because it acts as insurance for a home’s systems, often including plumbing, heating and cooling.

At a cost of a few hundred dollars, some real-estate agents consider it an inexpensive add-on that affords a buyer a little extra peace of mind, Dalzell said. That peace of mind can be especially welcome during the first year in a house.

Others take a different view, and say there’s often confusion over what elements are covered. If a problem is considered a pre-existing condition, assistance could be limited.

Plus, a warranty might not be necessary for a handy buyer who would likely take on projects himself, or ” if you’re buying a condo that’s two years old, a home warranty might not be that big of a deal,” added Zadel.

Those who accept a warranty should read the service contract and call the 1-800 number to ask questions, Dalzell said. If the seller pays for this add-on, he recommends having the buyer choose which company to use.

6. The little things

Other perks will appeal to buyers, too, ranging from the common to the unique.

Payment of homeowner association fees — typically associated with condo developments — are sometimes offered. Ramsey said that sellers with pools might also offer a year’s worth of upkeep for it, a welcome help to those worried about the maintenance of the backyard attraction.

Or maybe if a corner of the home was designed to fit a grand piano, leaving that instrument behind entices a buyer to go through with the deal, Conway said.

The important thing for buyers to remember, Conway added, is that they should honestly want this add-on. Translation: A homeowner with no interest in music probably should give up a piano for a more personalized incentive.

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In markets with a glut of homes for sale — and there are many of them — sellers are in fierce competition, each hoping to lure buyers to their properties for a showing. Some of them are making appeals to the pocketbooks of agents working with the buyers. And the buyer might never know about that added bonus.

“With the market shifting from a seller’s market to much more of a buyer’s market, those incentives are increasing,” said Leslie Tyler, vice president of marketing for ZipRealty, a real-estate brokerage headquartered in Emeryville, Calif. “When you’re selling a home, there’s a number of different levers you can pull to move your house quicker. You can change the price, you can offer an incentive to an agent, you can paint the front door.”

Mentions of cash bonuses, gift cards and other incentives are attached to some listings — information that real-estate agents can see through professional listing services but that buyers don’t have access to through printouts or Web sites. Builders are especially fond of offering extras, sometimes sending out emails to brokerages about them, said Noah Freedman, a principal with the brokerage firm Bond New York Real Estate.

One builder, for example, recently offered a $5,000 American Express gift card to agents in exchange for a buyer who signed a contract on a Long Island City, N.Y., condominium, Freedman said. During the last year, the agent who brought in a buyer for a penthouse in a financial district building in New York City was promised a fully paid lease on a BMW for a set period of time, he added.

The main advantage of these incentives: They often catch the eyes of real-estate agents, attracting attention to one property in a sea of available homes, Freedman said.

Whether they have that much of an influence on the eventual sale, however, isn’t as clear.

“At the end of the day, you can’t make someone buy something because you’re going to get an AmEx card,” Freedman said.

Extra ethics

Real-estate agents have a responsibility to show buyers the homes that best suit their needs, said Michael Thiel, associate counsel for the National Association of Realtors. And while the perks may be nice, “the obligation to the client is primary.”

The incentive could be influential when two similar homes are available — and one of them offers a little something extra, he said. In a case like that, an agent might show the property with the incentive first. But that could be where the advantage ends.

That’s because there’s also a financial incentive to finding the right fit for a home buyer, Thiel and others pointed out. If agents get greedy and only show homes that would give them a bigger payday, there’s a chance that clients won’t like any of them. The agent then risks losing the client altogether.

In general, agents are not obliged to disclose whether they get bonus compensation on a particular home, Thiel said.

But given the vast amount of information available to buyers via the Internet, it’s easy for savvy consumers these days to know what properties are out there — and decide whether they’re being shown all of the homes that fit their needs, said Phyllis Pezenik, vice president of sales and leasing for DJK Residential, a real-estate firm in New York.

“If a buyer becomes aware of another property that is similar or better … and the agent has not told them about it, that would tend to make them wary of that broker,” she said. “If you feel through your own research that you’re not being shown all the properties that meet your criteria, that definitely is a buyer’s decision to move on.”

Before going separate ways, Thiel said it might be wise for buyers to first talk about the concerns with their real-estate agent. But when a client doesn’t believe that their agent has his or her best interest at heart, then perhaps it is indeed time for a change in representation.

“There are a lot of agents out there who will try and work with them,” he said.

As for sellers considering the incentive tactic, try and get a gauge for what other sellers in the area are offering in terms of bonuses and commission share, Tyler said. A seller might ask brokers about perks other sellers are offering.

However, some might decide it’s a better move to appeal to the buyer’s pocketbook by agreeing to cover closing costs or cutting the sale price instead.

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Watching my grandmother, Big Mama, struggle to make ends meet, I’ve come to understand the desire that many people have in finding a way to build wealth.

Unfortunately, people sometimes become mesmerized by smooth operators who promise to help them reach their financial dreams. In some cases, these operators use religion to entice people into their schemes. In others, they use a community or professional connection. And then sometimes, they use race.

Frederick C. Lee Jr., founder of Financial Independence Group, markets himself as a self-made black man trying to help other blacks make it rich. However, he has only enriched some top lieutenants while using a network of associates to feed a mortgage-loan scheme that has recently run afoul of regulators in two states, according to former salespeople.

Since I began investigating and writing columns on his operations two months ago, Lee and Financial Independence Group have been ordered to stop all mortgage-related activity in Maryland. He had already been ordered to stop originating loans in Georgia.

My reports have prompted a dozen former associates to come forward with their stories. They provide an inside look into how Lee has fashioned his mortgage brokering scheme. It’s a tale of suspect business activities, multiple company names and false relationships with other financial institutions. Former associates say Lee promised them vast wealth. To reach their goals, they mainly focus on getting fellow blacks to refinance into a specific type of mortgage laden with exorbitant fees.

These former salespeople, who paid $100 to join the company, said they wound up disillusioned by Lee and disappointed at their own blindness — and in some cases at their own greed.

Neither Lee nor his attorney would respond to telephone calls or e-mails requesting comment for this column.

The men and women I interviewed said they didn’t at first question Lee and his behavior because they were transfixed by the potential prosperity he offered them. They said they believed that Lee wanted to help blacks achieve financial security.

Now they feel deceived.

During recruitment presentations, prospects are pumped up with stories of how others have made lots of money. Top performers are rewarded in front of the audience. Financial Independence Group’s Web site, which has been taken down since my columns began appearing, boasted that top salespeople received luxury cars — Range Rovers and Jaguars — and expensive Breitling and Tag Heuer watches.

Former associates said they realized soon that the road to riches meant getting as many borrowers as possible to agree to refinance into high-fee mortgages. During a Financial Independence Group presentation, I was told I could earn $500 if two homeowners I referred closed on loans through the company. All I needed to do was provide the referrals.

Although not commenting specifically about what I heard at the presentation or on Financial Independence Group, Brian Sullivan, a spokesman for the Department of Housing and Urban Development, said that the payment of referral fees for mortgages is prohibited under the federal Real Estate Settlement Procedures Act.

“RESPA is clear that giving or receiving anything of value in exchange for the referral of business is against the law,” Sullivan said.

In their quest for borrowers, Lee’s troops are deployed into black communities to sell a particular type of mortgage that some real estate experts say is inappropriate for most people. These salespeople — many of whom have little if any experience as loan originators — are sent out to meet borrowers in their homes to conduct what they call kitchen table presentations.

The product they tout is a payment option, adjustable-rate mortgage. It allows homeowners to choose the kind of payment to make each month — either a minimum payment, principal and interest, or interest-only. With a minimum payment, a borrower could face “negative amortization,” which means that the unpaid interest is added to the mortgage balance. With negative amortization you end up owing more on your mortgage than you originally borrowed. That’s a bad position to be in if you need to sell or refinance because you could end up owing more than the home is worth.

Under Lee’s direction, borrowers are encouraged to make the minimum payment and put the difference into investments, such as individual stocks or mutual funds, rather than pay interest or pay down the principal on their loans. Homeowners are left to figure out for themselves how to invest the money.

David Reed, a veteran mortgage banker and author of “Mortgage Confidential,” says Lee is putting people in a dangerous financial situation. What he is preaching to borrowers is “irresponsible at best, inhumane at worst,” Reed said.

Lee, of course, sees it otherwise. In a brief interview last month, he said his mission is to teach blacks “money movement strategies.”

The secret to financial salvation according to Lee’s business model is the payment-option ARM because it’s supposed to free up cash to invest.

But Lee doesn’t just lead black borrowers astray by pushing unsuitable mortgages. He attaches fees and prepayment penalties to the loans that would be classified as predatory by many consumer advocacy groups.

I asked Reed about the fees Lee charges. Although the total fees a loan originator earns varies based on the loan size, the industry standard is 1 to 2 percent of the loan. A 2 percent fee is high for someone with credit issues and definitely excessive for a typical, no-fuss refinancing, Reed said. Lee is charging many borrowers fees that ranged from more than 3 percent to as much as 5 percent of their loans, according to company documents that Reed and I reviewed.

“It’s extremely high,” said Reed, who has closed more than 1,000 loans as a loan officer. “It’s dumbfounding to me that he can get that much money on a loan. It’s sad and it’s taking advantage of people.”

The loans Lee and his associates push carry what is called a yield-spread premium, or YSP. A yield-spread premium is a fee a lender pays a mortgage broker for placing a borrower into a home loan with a higher interest rate. It’s a back-end way for the broker to earn more money. In some cases the borrower could qualify for a less expensive loan.

Though not illegal, this practice can land lenders in trouble as it did subprime lender NovaStar Mortgage. Without admitting wrongdoing, the company settled a class-action lawsuit for $5.1 million in June after borrowers accused it of either not disclosing the yield-spread premium or only telling them about it the day of their loan closings.

“Not all loans with YSPs are abusive, but because they are permitted and easy to hide, unscrupulous brokers can make excessive profits without adding value to borrowers,” according to a report by the nonprofit Center for Responsible Lending.

Is it a coincidence that when Lee finds himself accused of operating outside the law, he is quick to begin operating under a different name?

I don’t think so.

Lee began operating as Financial Independence Group shortly after the Georgia Department of Banking and Finance issued a series of final cease-and-desist orders for several of his Duluth-based mortgage loan businesses.

Over the years, he has operated as Debt Elimination Group, Debt Management Consultants and the Processing Center.

Six days after the Maryland Division of Financial Regulation ordered Lee and Financial Independence Group to stop all mortgage-related business in the state, a new company called CashFlo Strategies was registered in Delaware.

Lee’s business is now operating as CashFlo Strategies, according to company documents I saw.

Questions also surround the way Lee deals with licensing of his members to originate loans in Maryland. The state’s Department of Labor, Licensing and Regulation’s Division of Financial Regulation Enforcement Unit had been investigating whether Lee and his associates were licensed to originate loans. Over the course of nine months, Lee originated and closed 42 loans in Maryland without a license, the state alleges. As a result, Lee and his business were ordered to cease and desist from engaging in the business of mortgage lending in Maryland.

Investigators found that a dilapidated building in Baltimore was the business address that members listed on their license applications.

“It was a small single-family house in total disrepair,” said Stephen Prozeralik, director of enforcement for Maryland’s financial regulation division. “From the outside you would think it was an abandoned building.”

Salespeople living in Maryland who applied for originator licenses claimed they would be working from Florida for 1st Continental Mortgage, a lender in Fort Lauderdale, Fla., investigators said the applications indicated.

When Maryland investigators contacted 1st Continental’s president, Raymond L. Moatz III, he claimed he was not aware that a contract he signed with Lee meant that members of Financial Independence Group would be representing themselves as employees of his company to get licensed in the state. Moatz did not return my telephone calls for comment.

Maryland records show that at least 27 people working for Lee’s organization applied for originator licenses indicating that Key Financial, which is in Clearwater, Fla., was their employer. Information received by the state, however, indicates that Key Financial is not the employer or prospective employer of these applicants, said Sarah Bloom Raskin, Maryland’s commissioner of financial regulation. Bloom Raskin said she personally called Key Financial to tell the company of Lee’s operation and possible actions to circumvent state law.

Under Maryland Law, people seeking a mortgage-originator license must be employees or prospectively employed by a mortgage lender licensed in the state.

“Mr. Lee’s attempts to license his associates in Maryland by using misleading tactics are not welcome in Maryland,” Raskin said.

After I began reporting on Lee and his company, I received an anonymous e-mail questioning my commitment to the black community, as if reporting on the shady practices of a company that is black-owned made me a puppet for the white establishment.

“How could U not want black America 2 learn how 2 (build) wealth the same way as white America,” the e-mail said. “Shame on U.”

Shame on me?

What I found was a suspect company pushing loans with unjustified high fees that put African Americans deeper in debt while making only a few select black folks wealthy.

Building wealth in the black community, or any community, should come with integrity. It should come without harming anyone. It should come by being straight up with people.

It should come by following the law.

I don’t see race in this story. It’s about the color red.

This series has been about how people, whatever their color, shouldn’t ignore red flags because they’re too focused on green lucre.

What’s shameful is Lee’s behavior — and those who go along with him.

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