Week of April 7th 2008
8 Ways To Sweeten The Deal On Your Home
Excerpted/edited from Bankrate.com
Your house has been on the market for months. Is the age-old marketing ploy – the incentive – a home seller’s sure-fire solution in this buyer’s market? The answer is yes … and no. Offering freebies with your house is almost expected by some in today’s market. Buyers want you to help reduce the initial hit to their wallet should they buy your house. Incentives help. But it has to be an incentive that will help the buyer’s bottom line. To understand what works and why, first consider what’s happening in the housing market now.
1. Nationally, there are more homes for sale than there are people buying—but interest rates are fantastic and smart buyers are buying now. However, they can afford to be more picky. While home sales declined nationally 23.4% from January 2007 to January 2008, according to the National Association of Realtors, sales slowed most in the Western region, with a decline of 28.5%. The slide has continued month-over-month this year, even as prices continue to fall somewhat, and The National Association of Home Builders reports a 10-month supply nationally of new homes on the market, compared with a 4.5 month supply in 2005.
However, since all real estate is local, some markets are holding their own, or even thriving. The Baldwin County/Mobile County area market is holding its own, with much better statistics than in other regions, and activity is picking up, but still off from last year.
2. Some sellers are turning to incentives. In February, 55% of builders surveyed by the NAHB said they were adding optional items at no charge, compared with 37% in 2002. And 43% said in February that they were paying all or some of the buyers’ closing costs. Most bank foreclosure homes and corporate relocation houses are also offering financial incentives.
3. Buyers need to put cash down. Lenders have reined in those fully financed loans that helped trigger the mortgage collapse. Banks now demand not only better evidence that buyers can make the monthly payments but also that they have a financial stake in the property from the outset through bigger down payments. In 1989, the median down payment was 20%, says the NAR, and mortgage brokers have reported that institutions are inching back toward such heftier requirements. Even buyers who qualify for a low 3% down payment with an FHA loan still need to come up with closing costs, which add another 3% to 6% of the home’s price.
4. Many home buyers are first-time buyers. Without home equity to tap into, first-time buyers often have difficulty securing a large amount of cash. First-time buyers can handle the monthly payments; it’s coming up with the down payment and closing costs that’s hard for them. First-time buyers comprise nearly 40% of the market. Of those, 22% receive a gift from a friend or relative to cover some or all of those costs, and 7% use a personal loan.
4. Smart buyers are buying now because interest rates are fantastic—but they can afford to be more picky than before. Smart buyers are buying now. However, they can afford to be more picky than before since it is essentially a buyer’s market. Offering incentives can help attract them to your home versus another house.
Strong case for offering incentives
Add these four factors, say the experts, and you get a strong case for offering prospective buyers financial incentives. Help soften the financial blow associated with a new home, a time when buyers have the least amount of money in their pockets. They’re buying. They’re going to closing. They might have moving costs. They’re going to have to buy furniture. Anything that helps their cash flow is going to look great to them. It’s more true now than in recent years, say brokers. Today’s buyers are savvy. They’re analyzing price data and aren’t distracted by things that seem like gimmicks. Buyers react to those incentives or encouragements that impact their bottom line.
Here are some ways to offer financial incentives:
Pay closing costs
Closing costs include title, application and attorneys fees, and points paid toward the loan’s interest rate. They typically range from 3% to 5% of a home’s cost. The median price of a home sold in the United States in January was $201,100, according to the NAR. That means typical closing costs start at $6,000. On a conforming loan, sellers can pay up to that 3%, and up to 6% if the buyer is using FHA financing. It is one of the most popular incentives today. There’s definitely a trend for sellers to pay all or most of the closing costs for the buyers—it has a much bigger impact than dropping the price.
Why? Because the home price will be spread out over the life of the loan. Closing costs are due now. It’s much easier to pay $30 dollars a month than it is to save $6,000. (If you save $30 a month it would take 16.6 years, excluding interest, to amass $6,000.) Home builders rate closing-cost assistance as more effective than adding optional items or reducing the sales price, says the NAHB.
Buy down the mortgage interest rate
Instead of knocking down the price, a seller can give money to the lender to go toward the buyer’s interest payments for a certain amount of time, usually one to three years. Here is a rough example:
Rather than taking $5,000 off the price, the seller gave it to the buyer’s bank, where the buyer had a $200,000 loan. The bank used the $5,000 to buy 2 percentage points of the interest payments for the first 12 months and 1 percentage point the second 12 months. This reduced the buyer’s monthly mortgage payments from about $1,400 to $1,100 the first year and to $1,300 the second year. Given that the buyer had been paying $1,200 in rent previously, it eased the transition into the higher mortgage payments.
Pay toward the down payment
Lenders won’t allow sellers to fund a down payment directly, but they do allow you to help via special down-payment assistance programs as long as those entities do not have a direct interest in the sale of the property. These include government programs, employers or unions, friends or nonprofit groups such as the Nehemiah Corporation of America, the Housing Action Resource Trust and Partners in Charity. (The U.S. Department of Housing and Urban Development maintains a list of down payment programs whose nonprofit status has been revoked.)
Nehemiah, the largest of the charitable groups, has provided down-payment assistance to more than 250,000 home buyers nationally in the past decade. This is how it works: Nehemiah contributes up to 6% of a home’s price for a qualified buyer’s down payment. The seller later reimburses Nehemiah to replenish its account for other buyers. The buyer can get help from Nehemiah only if the seller agrees to repay the program, so the seller wins, the buyer wins and Nehemiah gains funds to help future home buyers. For FHA loans, which require only a 3% down payment, a seller could essentially offer 100% financing by working with a program such as Nehemiah.
Buy a warranty
This is a great incentive, say real-estate agents. It typically costs the seller just $400 to $500 and gives the buyer peace of mind that any mechanical or electrical repairs will be covered, minus a small deductible, in the first year. Sellers can add riders for other items, such as wells, spas or washer-dryers. Particularly for first-time home buyers, it really is a way for them to control or limit any unforeseen repairs. Ask your real-estate agent what companies they like to work with. Also, the home warranties don’t go into effect until after the sale, so you can prepare. A list of home-warranty companies by state is available here.
Prepay some first-year expenses
Buyers who might have exhausted their savings and entered into steep monthly payments may feel great relief knowing other costs have been prepaid for six months or a year. These could include:
- Homeowners association dues
- Taxes
- Utility payments
- Lawn maintenance costs
- Housekeeping payments.
Non-financial incentives
There’s no cap to what you can offer. Just make sure you are upfront and disclose transactions to your lender. Incentives can work as a psychological draw, say experts. But keep them fun and related to the house. Advertise that the incentive will be offered for a limited time, and if it doesn’t work, try something else. Steer clear of politically incorrect items that might offend prospective buyers, such as fur coats or energy-hogging cars.
Be wary of paying for inspections or repairs
It’s possible to pay for these if need be, but it’s not necessarily a good idea. A home inspector should represent the buyer. If a buyer pays for the inspection, there’s less chance someone could cry foul later. You don’t want to be accused of being in cahoots with the inspector simply because you signed the check for his work. Also, if the seller offers to pay for repairs as a condition of sale, the buyer’s lender could require that the work be completed prior to funding, potentially stalling the sale. It creates a hiccup in the transaction. Instead, what lenders will suggest is that the seller apply that money toward the closing costs. You can proceed and no work needs to be completed before the close.
Stay aboveboard
No matter what kind of incentive you ultimately offer, keep in mind that you’ll need to be upfront about the details with all interested parties. Both parties must disclose any transactions made as part of the process. Spell out the value of incentives clearly. With those caveats in mind, offer incentives. They can send a strong message to buyers that you are willing to negotiate. In some cases, buyers prefer incentives over lower price. Just calculate the exact value and make it clear.