(Originally published April 10, 2010.)
Today’s difficult real estate market faces many challenges:
- A large inventory of unsold homes has caused price stagnation.
- Distressed sales are putting downward pressure on market values in certain neighborhoods.
- Sellers still resist coming to terms with their neighborhood’s drop in values.
- Many buyers looking for a “steal” are slamming into this seller resistance, making agreements more difficult.
- Financing has become more difficult, with stronger credit, lower debt to income ratios, and larger down payments often required.
These challenges demand new approaches and new solutions that meet the needs of both buyers and sellers. One solution I’ve found successful is a seller-funded permanent rate buydown. This occurs when a seller’s credit is used to pay points, which reduces the buyer’s interest rate. This simple strategy can produce a significant monthly savings for the buyer, all while retaining the seller’s equity in the property. Dollar for dollar, buydowns cost a seller far less than the standard price reduction, yet benefit the buyer by reducing his monthly payments far more than an equivalent price cut.
Consider this example:
A $500,000 house with a $15,000 price cut (assuming 80% financing) would only save a buyer $64 per month. However, that same $15,000 credited as a buydown (keeping the purchase price at $500,000), would reduce the purchaser’s interest rate by a full 1% and save him $237 per month! This payment is as if the buyer purchased the home for $445,000!
Interest rate buydowns offer a WIN-WIN solution to buyers, sellers, AND realtors!
- Sellers make their homes stand out with a unique financing package, making their homes significantly more affordable than competing houses.
- Sellers protect their equity with higher closing prices.
- Homes sell faster. Sellers and Realtors typically see a shorter time on the market.
- Realtors earn potentially higher commissions with sales agreements closer to full asking price.
- Buyers benefit from a below-market interest rate.
- Buyers enjoy monthly payments as if their home was purchased for far less.
Utilizing a buydown makes it possible for a buyer to purchase a home with the monthly payment he seeks while allowing the seller to net the equity he desires. Negotiating is faster and easier since the seller is more agreeable to these terms. If you would like more details regarding buydowns or on successfully marketing a property utilizing buydowns, please contact me. Working together, we can ensure your transaction goes smoothly, benefiting all.
Since 1992, Warren Goldberg has helped thousands of clients own their homes, refinance their mortgages, restructure their debts, and invest in real estate. Warren is known for his wide knowledge of mortgage products and wealth-creation strategies.