Increased Incentives Carry Challenges

Services for Real Estate Pros with Liberty Mutual

Today the Tennessean is reporting about the increased and unusual incentives being offered by sellers. (see the link below) One builder is offering a car or a trip or a year's tuition to Vanderbilt. Sounds great!

But buyers need to be aware that such incentives will likely reduce the amount that a lender can lend off of, essentially voiding the incentive. For example:

Sales Price:  $350,000

Incentive:   $10,000

Sale Price Lender will use:  $340,000*

*This number is then the starting point for all lending factors - ie, 80% LTV, appraisal, ect

80% LTV = $272,000

Borrower would bring $78,000 to closing ($350k - $272k) plus any closing costs and prepaids


In this scenario the borrower would have to bring an extra $8k to closing to cover the reduction - so there is NO incentive!

Now this only applied to incentives that aren't related to the home. If the contract states that $10,000 will be used for closing costs and prepaids - and you are within the loan program's allowable guidelines - then you'll be fine. But incentives that are not related to the home or the transaction will likely cause borrowers some pain. Also becareful on items that appear to be related to the home - such as drapes and flat panel TV's - lenders finance real property not decorations that likely won't still operate or be in fashion when the home is marketed again.

I had this experience with a Florida home buyer who was provided on the contract with a 7-day cruise. We had to establish value for the cruise and reduce the value of the amount by that amount. The buyer was obviously not very happy and eventually rewrote the contract without the cruise for about $3k less.

As a lender, I feel like we are too often the ones who lay the law down and say, "sorry, can't be done." Sometimes I feel like an overprotective parent that won't let the kids play on the swings. But so much in our business is about setting expectations. Remind your clients that they are buying a home, not a trip or a car. Have them fall in love with the home, not the incentive and then negotiate down without the incentive.

What about paying my taxes and insurance for 2 years? Items related to the cost of acquiring the home can be included - as long as they fall within the loan program's guidelines. Your lender and title attorney can hammer out what can be done in this realm.

Most sellers are putting these carrots out there simply for the attention - they will likely get increased attention but is it the right attention? Too often, you'd get the same result if you just gave away free hot dogs (maybe not for the $2m listing) - and in that case you wouldn't have to worry about the incentive messing with the financing.


Comments (3) ~ Dallas Real Estate Agent Top Team
Dallas Houses for Rent Dallas Apartment Rentals - Dallas, TX

We are doing it here in Texas incentives usually it does the trick, for the trade many are hurting, even in apartment rental we are getting paid incentives.

Dallas homes for sale, Call 972-699-9111 Lynn 911 Dallas Top Real Estate Agent, Dallas homes for sale, Dallas home foreclosures for sale, Dallas homes for sale, Dallas foreclosures, Dallas apartments for rent, Dallas apartment rentals, , http://

Jun 20, 2008 02:40 AM
Associate Broker Falmouth MA Cape Cod Heath Coker - Falmouth, MA
Heath Coker Berkshire Hathaway HS Robert Paul Prop

How about posting positive news about the TN real estate market.  Did you know that Chattanooga, Bristol, Kingsport, Knoxville, Memphis, Nashville, Mufreesboro, Davidson, Franklin, Johnson City, and Morristown all had positive appreciation in 2007?  See this report to see the data!

Jun 20, 2008 03:08 AM
Kevin Michelson
Liberty Mutual - Nashville, TN
MBA, Nashville Insurance


You won't find too many people more positive about the market here than I am! I was in Florida 18 months ago - talk about negative. People down there were so miserable. This are still real strong here - fundementals are great still.

This Worcester area native says, Go Sox and Congrats Celts!


Jun 20, 2008 04:20 AM