I admit it...as a lender, I've had to change my game plan over the last couple of years. Much of my old business used to be refinance business. But then, the big crash hit and all of the sudden people couldn't refinance anymore. As of late, some of the refinances have started to come back, but I wanted to share a strategy with you that you may or may not be aware of. It's actually been around for a long time, but I picked up on it about two years ago.
The strategy that I'm referring to here is called, "The Seller Buy down". In a nutshell, instead of reducing the list price of a home, the seller should offer to buy down the interest rate on a perspective buyer. This does two things for the homeowner:
1) It allows the homeowner to get full value for the property keeping most of the equity that they may or may not still have.
2) It allows less income to qualify for perspective buyers. By "buying" down the interest rate, the buyer's monthly payments will be lower and thus there will be more people who can qualify to buy the home.
Let's take a look at the following example and see if you get an "Ahh ha" moment.
Traditional Financing
Purchase Price: $500,000
Down Payment: 20%
Loan Amount: $400,000
Program: 5/1 IO
Rate: 6.75%
Payment: $2900
Income to qualify: $109,000
Monthly Savings: --
Price Reduction
Purchase Price: $480,500
Down Payment: 20%
Loan Amount: $384,400
Program: 5/1 IO
Rate: 6.75%
Payment: $2812
Income to qualify: $105,500
Monthly Savings: $87.75
Interest Rate Buy down
Purchase Price: $500,000
Down Payment: 20%
Loan Amount: $400,000
Program: 5/1 IO
Rate: 4.875%
Payment: $2275
Income to qualify: $85,500
Monthly Savings: $625
Do you see what I've just done here? I've created a win-win situation for everyone. As a seller, you will get a lot more equity out of doing a buy down, rather than reducing your price. As a listing agent, you'll get more commission. And as a buyer, you've just gotten a gift in the amount of $625 savings per month. More people will be able to qualify at the lower income as well.
Here's the kicker...if you were to reduce your price to attract buyers at that income level (for this specific scenario), you would need to reduce it to $363,500. That's a $136,500 price reduction which would a seller would NEVER agree to.
I hope this gets you thinking...
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Great post! I've championed the strategy of buying down the rate many times.
Not only does it get the seller the price that they need, it also gets the buyer a payment they can afford!
Another point not to be missed is that when the home is sold at the asking price and the buyer still gets a lower payment, it keeps the market from sinking lower and lower because it sold for a higher list to sell price ratio and that's good for everybody!