Thinking of a Price reduction?

By
Mortgage and Lending with Loan Simple CO MLB 100039004

Think seller contribution... it is cheaper!

When home buyers shop, they look at price but make their buying decisions on monthly cost.

Your home is overpriced; the first question to ask is why?  Did your agent fail to do his/her job and provide you with a proper CMA, or did you not listen to the professional you hired?  The second question is what do you do about it?

 
Well, there are several options:

1.      You could take the property off the market until the market catches up with you.

2.      You could lower your price.

3.      You could buy a permanent interest rate 'buydown' for the buyer.

 
Let's compare:

1.    The first option is simple...Maybe.  What about the holding costs?  How much will it cost to hold the property the extra time while you wait for the market to increase?  Will the holding costs eat up the difference between the time values?

2.     Lower the price?  Round numbers seem to be the norm, $5,000, $10,000.  The obvious here is a reduction of the seller’s net by $5-10k.

3.      A rate buydown?  Example: If the buyer’s interest rate from his lender is 6%, a sum of upfront interest is paid to lower the rate, say to 5.5% (or lower).

 
We know the cost of a price reduction.  What is the cost of a buydown?  Although this may fluctuate from day to day typically 2% of loan amount will buy .5% of interest rate.

Assumptions:

Purchase price: $200,000

Down pmt: 5%

 

Example #1 (full price w/ buydown)

Loan amount: $190,000

Interest rate: 5.5%

PI pmt: $1,079

Cost to seller: $3,800

 

Example #2 ($5k price reduction)

Loan amount: $185,250

Interest rate: 6%

PI pmt: $1,111

Cost to seller: $5,000

 

Example #3 ($10k price reduction)

Loan amount: $180,500

Interest rate: 6%

PI pmt: $1,082

Cost to seller: $10,000

 

Conclusion:

For $3,800 vs. $10,000, the seller can deliver to the buyer the same monthly payment.

 

** For those of you calculating total cost over time: Yes, the $10k reduction saves the borrower $500 in down payment and the payoff after 7 yrs (typical holding time) is $6,500 less with the price reduction, BUT remember…Monthly payment is how MOST people buy.

 

Comments (1)

Jeffrey DiMuria 321.223.6253 Waves Realty
Waves Realty - Melbourne, FL
Florida Space Coast Homes
We have offered buy downs in the past as well as BTSA's (bonus to selling agents) they are both better then a price reduction.
Apr 22, 2008 08:31 AM