No more price reductions! No I'm not calling the bottom for the housing market. (Although I think it's come and gone.) What I'm talking about is using creative financing alternatives in place of price reductions for your listings. Let's look at a couple of examples of how this works.
You have a $200,000 listing that isn't selling and you and your client's are considering a $5,000 price reduction. What I am suggesting is that rather than a $5,000 price reduction you do a 2/1 buy down for just a couple of hundred dollars more. Let's look at the difference that this creative financing alternative makes in the payments. For the sake of this example we will be doing 100% financing.
The price reduction would look like this.
$200,000 - $5,000 price reduction = $195,000 loan@ 5%=$1,047/mo
Now compare this to the 2/1 buy down option.
Year 1 $200,000 @ 3% = $844/mo
Year 2 $200,000 @ 4% = $954/mo
Year 3-30 $200,000 @ 5% = $1,074/mo
The initial payment is considerably less allowing some breathing room for a new home owner. However, keep in mind that the buyer has to be qualified at the fully indexed rate. I find the 2/1 buy down creative financing option to be an attractive option especially to the first time home buyer. It also allows your seller to brag to his neighbors that he got his original asking price. More importantly, it maintains pricing comps for the rest of the neighborhood.
A second creative financing option, although considerably more expensive, is the permanent rate buy down. This will run between 4 and 5% of the loan value to permanently buy the mortgage rate down 1 point. For example to permanently buy the same $200,000 loan down 1 point would cost between $8,000 and $10,000. There are 2 tremendous benefits to the buyer in this scenario.
1. This allows the buyer to qualify at the bought down rate and possibly buy more home.
2. The savings for the buyer over the life of the loan is exponentially greater than the cost of the buy down.
This second creative financing option is one that I rarely employ simply due to the cost. I do however make my buyer clients aware of it as an option to a larger down payment. If they plan to be in the home for an extended period it is a cost effective strategy.
I hope you will consider using creative financing options in place of price reductions as a tool to limit price erosion in the communities that we serve. I would welcome hearing about any creative financing options that you find useful.
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