I've been introduced to a new program that protects home buyers from price declines. I'm interested in hearing the opinions and comments from other agents and brokers about this concept.
The program works similar to the way an insurance plan works and provides homeowners with price protection of their home equity if their home value drops.
The way it works is homebuyers or homeowners choose how long of a period of time (1- 10 years) they want to protect themselves from the possibility of falling prices. (They can stop the program at any time by either cashing in the contract in or quit making premium payments.) The contracts are based on larger sampling of home values in their surrounding neighborhood or community. The index being used is Office of Federal Housing Enterprise Oversight (OFHEO), which is the same basic idea to the S&P Case Shiller Housing Futures Index. Because the contracts are based on a larger area and not the individual house, homeowners are still rewarded for maintaining their homes and improving them. If their house went up in value but the larger area on which the index is tied to went down, they would still be entitled to collect on the contract. For example, a homebuyer buys a house for $500,000 and takes out this home price protection plan.
Let's say these homes in this area were to decline 15% over the next two years. The homeowner could then cash in their contract and receive $75,000. Some the variables to choose from in the plan are the trigger events. One option is the home has to be sold at some time. Another option is the home does not have to be sold so the homeowner can collect if prices fall without having to sell their home. This option is more expensvie, though. The contacts have an elimination period of 12, 18 or 24 months before one can make a claim on it or cash it in. The elimination period is another factor that raises or lowers the premium.
It seems to me some sellers might be willing to pay at least a part of the premium for the first couple of years in order to get the sale made instead of lowering their price. At the end of two years the homeowner could continue with the plan, buy a new plan , cash it in, or just stop making payments and drop the plan. It makes no difference who pays the premiums. Builders might even want to offer this in lieu of other incentives.
What do some of you think of this type of program? Do you think this would help in making a sale? What are some of the situations where either buyers or sellers would go for this? Your opinions are appreciated.
Brandon M
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