Why A “Lower Price” May Not Be A Better Deal!

August 24th, 2010

Are we really that gullible to believe the old saw that someone else can price a product or service cheaper than everyone else? Apparently so, it is a gimmick that has been working for centuries. But if you really take a hard look, the lowest price is not always the lowest price.

I am all for a deal. And I am all for shopping. And I am all for competition. I have numerous sources to find my clients competitive loans. Buts its some clients that always have to go one better and find THE BEST PRICE, they get me riled up, and that’s because the best price usually never exists. I’ll explain.

If you have checked 50 sources for a mortgage, and they are all about the same, let’s say the hypothetical rate quotes are around 4.50% with 0 points for a 30 Year Fixed, and maybe a few are 4.75%, a larger group are at 4.625%, and let’s say most lenders in this group are at 4.50%, so that is obviously what you want. But then, let’s assume this client is “Sam Shopping Smart Guy”, and Sam is going to get THE VERY BEST RATE. So Sam calls more lenders and mortgage brokers, and surfs websites. And Sam comes up with a lender at 4.375% with 0 points, who promises to get the job done, efficiently, quickly, and at the cheapest price.

Now, let’s stop for a moment, there are 50 lenders at 4.50% to 4.75%, how is it possible that there are one or two lenders are 4.375% when the bulk of the industry is 4.50% to 4.75%. You don’t care, you’re Sam Shopper, and you are going to get THE BEST DEAL. So Sam applies with the lowest price lender, but…the story changes.

This is actually a real story, but to protect the privacy of the name of the mortgage client and the lender he went to, I’ll stick with the fake names I am using. “Sam” did indeed apply with me for a loan at 4.50% a few months ago, 2 days after loan application he shopped some more, and went to another lender for 4.375%. After lengthy discussion and trying to explain how I could not go below what I already saw as the lowest price out there, Sam went elsewhere for THE LOWEST PRICE. He really wanted to work with me, because I always got back to him quickly, offered efficient systems, had a value added website, prepared advance amortization schedules and Good Faith Estimates, and gave the best service all around, but he wanted the best price. Sam wanted steak, but wanted to pay hamburger prices.

I was sad to see Sam go, we had a good rapport and I liked him, but its a free market, and he made a choice. Sam went to an online lender in this case. Two months later Sam called me dismayed that his online lender had not processed his loan application in a timely manner, already needed to extend his “rate lock-in” one time, and they were talking about doing it a second time. And he was not getting his calls returned in a timely manner, and he usually had to wait a long time to get feedback on the status of his loan application. Each time it was easy for this online lender to extend his lock-in on his rate because rates were flat or dropping. But he was worried that if rates jumped up, they would not honor his original lock-in of 4.375%. The story goes on, but I think you get the point.

What some perceive as THE LOWEST PRICE usually comes with strings no one will know about until you are already in bed with your chosen mortgage provider. Whether it is poor service, delays, no return calls, hidden fees, or not being able to get your loan at all, is it really worth the hassle and drama for a small price differential?

I can see going for the lowest rate if there were 30 banks at 4.375% and 30 banks at 4.50% and 30 banks at 4.625%. If there are numerous providers at the rock bottom rate, and many of them reputable or known to you, why wouldn’t you go that route? But if only a few have the rock bottom rate and everyone else is higher, doesn’t that give you a hint that is something is awry?

And this is not me whining about competing in the mortgage business. This is my motto in life, I make all my decisions in life by avoiding THE LOWEST PRICE. When I was younger, I made the mistake of using the lowest cost mover once. Here is what I got for THE LOWEST PRICE on a move I was out of town for so I paid the movers to supervise, pack and move me:

-3 week delayed delivery my household items and furniture past the estimated delivery date (leading me to sleep on a friend’s couch).
-3 broken items, cost to repair $340 (no reimbursement).
-a $1200 dry cleaning bill because the moving company’s packers stuffed, literally stuffed, my suits and clothes in trash bags and jammed them all into these bags, as opposed to using garment boxes and hanging all my clothes (no reimbursement).
-I opened a trash can as I was unpacking, and they did not empty the trash from when they moved me out of my old house! Hundreds of flies flew out and flew around my new apartment for days.
-A lot of excuses.
-No apology.
-And I could go on, but I am getting tired of typing.

So the $1500 I thought I saved on the move was a little more than offset by the costs the fees the movers cost me. I would have been better “paying more” originally, which would have cost me less, and would have also cost me less drama and hassle.

I could also tell more stories, I have many. I have made mistakes with cars, accountants, movers, dry cleaners, contractors, and more. But now I live my life by the “there is no free lunch” motto. I never pay the lowest price, and I never pay the highest price, and I almost always get excellent service, and am happy to pay someone a fair price for it.

We should all ask more questions, and think about how its possible for a few service providers to price below the bulk of the market, and ask if its worth the almost inevitable headache. I’ll close with this quotation:

“It is unwise to pay too much, but it is worse to pay too little. When you pay too much, you lose a little money – that is all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it cannot be done. If you deal with the lowest bidder, it is well to add something for the risk you run. And if you do that, you will have enough to pay for something better.”

by John Ruskin (1819 – 1900) who was a Victorian era thinker and an artist, scientist, poet, environmentalist, philosopher, and the pre-eminent art critic of his time.

Brian Martucci is a loan officer for Capital Bank Home Loans, a division of Capital Bank, N.A. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Home Loans or Capital Bank. Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.​

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