How to Judge Seller Incentives in a Buyers’ Market
The phrase “buyers’ market” continues to crop up in housing market commentary. The idea is that since home prices are still sliding, buyers naturally have the upper hand. But bargaining power is slippery, and shrewd sellers can actually exploit this perception to their own advantage. Still, there are sellers offering legitimate incentives, and if you understand how the game works, you can come out ahead.
Seller incentives come in various forms. They can be material in nature, such as a free furnishings/electronics or an “upgrade” on a house bought directly from the builder. Other times, sellers will agree to cover closing costs and other fees. Still other sellers will try to compete by offering unique financing, such as a lease-to-own or wraparound mortgage. Some sellers will even offer a discount on the purchase price.
The latter is certainly the best incentive, with rebates for closing costs not far behind. Both represent cash in your pocket, as opposed to a nice television, which can be difficult to quantify, in which case you might just ask for the cost of the TV to be handed to you, in which case you have the freedom to spend the money on whatever you’d like. Still, a free TV is a nice incentive, as long as it’s truly free (i.e. not factored into the purchase price) and is something you would have probably purchased anyway. If the purchase price has been adjusted for the cost of the incentive, then you essentially lose twice. Not only were you conned via a false incentive, but also the higher purchase price equates to a bigger mortgage, and more interest.
Seller financing can also be a great incentive. A lease-to-own mortgage gives you an extra year to raise cash for a down payment and also a chance to live in the property before you commit to buying it. Usually, a portion of the rent you pay to the seller during that year is applied towards the down-payment. A wraparound mortgage, in which the seller keeps the original mortgage and you make payments directly to him- works great when interest rates are rising. Even in the current low-rate environment, wraparounds can be useful for buyers with less-than-stellar credit. A wraparound mortgage is ultimately more risky for the seller, who also assumes the role of lender. Still, it’s important to first seek the actual lender’s approval.
Builders are especially ripe for seeking incentives. They are often unwilling to lower the sale price, in order to maintain the appearance that the homes are more valuable than perhaps they actually are. Accordingly, a builder may thrown in a free sunroom in order to close a sale, since he can still show that the house sold for a certain value. If instead he had discounted the sale by the value of the sunroom, then he would have lowered his bargaining power with future buyers.
When bargaining with buyers, it’s important to be aware that some “incentives” are actually scams. The most common scam is a “recommendation” to use a specific selling agent (if you must first sell an existing home) or lender. “A builder will often try to steer you to an affiliated mortgage lender, with a promise to give you a discount. But you can’t count on the mortgage company to give you the best deal on rates and closing costs in the first place.” Anecdotal evidence suggests that such “referrals” rarely result in better deals, and in fact some practices may soon become illegal, as they violate anti-trust provisions.