What Kind of Concessions Can Buyers Expect?

On Top of Buyer’s Closing Costs, Perks and Price Cuts Become More Lavish

With the housing market looking increasingly frail, home builders and home sellers are going to new extremes to attract buyers, dangling lavish incentives and slashing prices.

In a recent Wall Street Journal article, examples of some concessions include:
In Boca Raton, Fla., Gordon Homes is offering to pay two years of property taxes and insurance -- worth as much as $150,000 on houses priced as high as $2.5 million -- for buyers of completed homes at its upscale Azura development. In Richmond, Va., Orleans Homebuilders Inc. is offering "Sizzling Summer Sale Savings" that include as much as $100,000 off the cost of upgrades ranging from granite countertops to a conservatory. And in Medford, Ore., Diane Adams, a real-estate agent, is offering to pay four months of mortgage payments on the $975,000 house she and her home-builder husband constructed on 20 acres near Crater Lake. "I'd also negotiate a lower price, too," says Ms. Adams, an agent with Re/Max International Inc. "I just want this house off our books."

Across the country, the theme is the same: Home builders and home sellers are juicing their efforts to unload single-family homes. Among other things, they are offering buyers cash discounts of as much as 20%, throwing in a pool and agreeing to finish basements, garages and other spaces at a cost of several thousand dollars -- incentives much richer than builders were offering as recently as six months ago, when the downturn didn't look as bleak.

The full article can be found at http://online.wsj.com/article_email/SB118661750287092393-lMyQjAxMDE3ODA2OTYwMTk3Wj.html

So what is happening locally??


Price concessions are rampant in the market, as motivated to sell homeowners continue what I have termed ‘the dive to the bottom’. Unmotivated sellers may be sticking to their price, but their numbers of showings decline and disappear as buyers look for deals elsewhere. Increasingly, sellers are offering to pay buyers’ closing costs, which is a nod to the already well-established de facto practice when an offer to purchase comes in for review. All buyers have already caught on to this perk. They ask: What else?

I’ve had sellers offer to include TVs, refrigerators, washers and dryers, gym setups, other furniture, cars, and all sorts of personal property as incentive to buyers. While these things are nice, it doesn’t swing the deal. More important to buyers can be financing terms such as buydowns, where the seller pre-pays interest on new loans. Increasingly buyers are asking sellers to carry a second mortgage of 5% or 10% (or even more!) for those sellers who have a lot of equity in the home.

For some sellers, a monthly payment on a second mortgage can be more important than all the cash in hand at once. A common arrangement for the seller carrying a note would be at 10% interest, amortized over 30 years and all due in 5 years.
Other concessions that buyers are asking for (and sometimes getting) would be pre-paid property taxes and insurance, homeowners association fees, Mello-Roos fees, and other recurring fees of that kind. Pre-payment terms can be six months, a year, or even more.

Motivated sellers who want their homes sold can get pretty innovative, given their particular circumstance.

If the property needs repairs or updating and the sellers can’t financially handle it prior to close, credits can be given to be applied to this type of work to be performed after close of escrow. Usually the lender will require these funds to be held in a special account to ensure that the work gets done and the buyer doesn’t just pocket it at close, but I’ve also seen some cash backs to buyers. Examples of work needed in a home for sale: new roof, re-piping, painting, carpets and flooring, landscaping, updating kitchens and baths, and miscellaneous repairs.

The home builders are another matter. Lennar, KBhomes, KHov, and the other builders active in the area have various incentives that are available to buyers, and some additional incentives if home buyers take a Realtor along on their first visit to the sales office. While buyers, as usual, overestimate their negotiating prowess when dealing with home builders, often choosing to ‘go it alone’ without the assistance of a Realtor, they end up unrepresented in the transaction and lose big time in the end. But that’s the psychology and ignorance of the new home buyer at work. God luv ‘em!

New home builders employ a sales staff to work in the builder’s interests, not to just smile and give away the store! Think about it the next time you go to a new home development. Then call me at 661-287-9164 and I will go with you, but remember, it must be on first visit when you register. Otherwise, I cannot help you get the best deal possible.

Builders generally try to avoid outright price markdowns, in part because it angers prior home buyers who don't want prices in their subdivisions forced down. These days, though, builders increasingly resort to price cuts because it's all about avoiding bankruptcy for some.

Builders are increasingly willing to pay agents substantially larger commissions -- as much as 4% or locally, even 5% of the home's sales price, up from 1.5% or less -- to help unload inventory homes. This trend is reflected in the re-sale market, where discount brokers are having a tough time with many going out of business, and the 6% commission as the standard for listing a home has returned to the market. Lower commissions just don’t work in a market where the average time on market is well over 90 days and there are few buyers. Incentivizing the listing agent to fully explore marketing outlets is important, and bringing the buyers in the door involves offering a competitive (and higher) commission to the selling agents. With as many homes on the market as there are, the selling agent has many many choices of homes to show a prospective buyer. One way to get that buyer in is to increase the Realtor’s commission. What many home sellers often don’t understand is that keeping a buyer involved through the escrow period is just as important, and the offering of a competitive commission is a critical aspect of that process.

This trend toward more-generous incentives is "likely to intensify," says Mark Zandi, chief economist at Moody's Economy.com, citing a growing inventory of new homes, an oversupply of pre-owned homes on the market and "a glut of homes that are a year or two old that investors bought as rental property that have never been lived in, and those investors are now trying to sell, too."

The best deals go to those who are ready to buy and can close within 30 days and who have no contingencies in their contracts, such as the need to sell another house or find financing. Those buyers get the highest concessions. Also, have a preapproval letter in hand, which indicates that a lender is ready to fund your mortgage immediately up to a certain amount, is an essential part of the offer. After all, an offer and a contract is only the beginning, closing the escrow is the real deal.