Peter Miller on Real Estate: Commodity Pricing May Lead Lenders to Sweeten Deals

May 1, 1999

My first real estate job had me working for a Wall Street property management company during high school vacations. The New York company owned or managed thousands of units, and from my experience I learned three things:

  1. Save supermarket bags. The company would dump bundled rent checks into plain paper bags for daily trips to the banks that lined John Street.
  2. Keep quiet. The less people know about your business and your assets, the better.
  3. Buy stuff in bulk. The property managers, bought coal, for example, bythe ton and by the grade (rice, pea, nut, stove, and buck). It didn't matter who supplied the coal. Coal was coal. The supplier with the lowest cost won.

Mortgage money, like coal, is a commodity. If you're a borrower, you don't care if a loan comes from First National or Second Federal. Given two mortgage options with like terms, consumers will pick the cheaper one.

If you're a real estate practitioner, you want as many mortgage options as possible. You want low rates, but also a variety of programs to fit the needs of various buyers. And if it happens that the Internet allows for cheaper, easier-to-get mortgages, that's great news.

Although mortgage money is a commodity, commodity pricing is only available to those who know how to shop and compare. Mortgage rate shopping use to mean talking to brokers, checking the newspapers, and calling lots of lenders. Today, with perhaps half of all households online, instantaneous comparison shopping (and thousands of loan originators) is here--and with it commodity pricing for any borrower with enough skill to click a mouse.

Commodity pricing is good news for consumers, but problematic for suppliers. If you have a market filled with people all selling the same thing, competition not only drives down prices, it creates clutter. In marketing terms, clutter means that sellers have a limited ability to stand out because they're marketing like products (think of VA loans) at tiny margins.

Why should consumers buy from one seller and not another? Because a seller breaks from the pack--establishes a brand name, offers something different (these days van manufacturers are touting cup holders as a big selling point since most vans aren’t that much different from each other), and markets with both paid advertising and public relations.

Look on the Internet and you'll see many cases where sites and services are trying to distinguish themselves in the market place., an ISP, has announced that it'll give away 1 million computer systems for those who subscribe for $25.99 a month. Just as interesting, the company promises to upgrade computer systems at least every three years.

RealSelect Inc., which operates REALTOR.COM for the NATIONAL ASSOCIATION OF REALTORS®, held a "Get Connected" sweepstakes this year for consumers and real estate practitioners. A consumer won $250,000 toward a home purchase and 26 practitioners won prizes ranging from $10,000 to AOL memberships. says it'll distribute up to 150,000 copies of Realty 2000, a proprietary salesperson productivity software package that retails for as much as $500, to practitioners who attend company-sponsored seminars on the Internet and desktop productivity software and to those who buy the company's Internet-based MLS conversion product.

FreePC is giving away at least 10,000 computer systems--but they'd like to know about you and what you buy before they hand them over.

NetZero, an Internet service provider, has at least 500,000 subscribers who don't pay monthly fees--but they're exposed to a constant barrage of ads while they're signed on to the Net., an online retailer, is willing to sell merchandise at cost--and maybe below cost. The logic is the good prices produce big traffic, and traffic is something advertisers covet.

The impact of online marketing will be substantial since a large portion of the mortgage marketplace is devoted to the same, basic products. In 1998 there were 1.1 million new FHA loans, 343,957 VA mortgages, and 1.47 million insured conventional loans, according to the Mortgage Insurance Companies of America.

Lenders must sell like products with tighter and tighter margins, so we're likely to see several online marketing strategies emerge, namely:

Speed. The Internet is equated with speed, so we'll find sites that can qualify you in 27 seconds--subject, of course, to an appraisal, final credit check, a few verifications, and contract review.

Low prices. Given the ability to compare prices, lenders will likely offer discounting and margin cutting. In truth, the Internet is so competitive that all lenders will be forced to operate with the smallest of margins.

Premiums. If various sites and services can give away computers and software, why not lenders? If I have a choice of loans with identical terms and one lender pitches in a free computer, then why not go with the lender who offers the premium? The big question, of course, is whether the loan terms--rates, points, and fees--will be identical.

For lenders none of this is good news. The point isn't that all lending will move online or to just a few sites, but rather that competitive forces will tighten lender margins. The result is there will be local lenders in the future, just as there are local bookstores, but there won't be as many.

Peter G. Miller, OurBroker®, also writes a column that appears in Realty Times each Tuesday, and is the author of The Common Sense Mortgage, the best-selling guide to real estate finance. He's the original creator and host of the Real Estate Center with America Online and maintains a consumer information site at

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