With rising interest rates, many agents are turning to price reductions to get their listings sold.
But what if there’s a better way?
Let’s compare a price reduction with a buydown!
We’ll use an original sales price of $650,000…(and reduce it by $50,000!!) <ouch>
The first example below is what happens with a standard price reduction. The second example is when you keep the original price and do a temporary buydown instead…and the third example is using a permanent buydown (these will be described in detail shortly.)
$50K Price Reduction
| Original Sales Price: | $650,000 |
| New Sales Price: | $600,000 |
| 10% Downpayment | $60,000 |
| Loan Amount: | $540,000 |
| Interest Rate: | 6.75% |
| Principal & Interest: | $3,502 per month |
| Cost to Seller: | $50,000 |
2-1 Temporary Buydown
| Original Sales Price: | $650,000 |
| New Sales Price: | $650,000 |
| 10% Downpayment | $65,000 |
| Loan Amount: | $585,000 |
| 1st Year Payment: | 4.75% |
| Principal & Interest: | $3,052 per month |
| Buyer Payment Savings: | $450 per month! |
| Cost to Seller: | Only $13,464 |
Permanent Buydown
| Original Sales Price: | $650,000 |
| New Sales Price: | $650,000 |
| 10% Downpayment | $65,000 |
| Loan Amount: | $585,000 |
| Bought-Down Rate: | 5.75% |
| Principal & Interest: | $3,414 per month |
| Buyer Payment Savings: | $88 per month |
| Cost to Seller: | Only $14,625 |
The Buydowns Win For Both Buyer and Seller!
Either buydown will save your seller a TON!)
Buyers also save on their monthly payments!
Don’t become just ANOTHER price reduction
And also…don’t give yourself FUTURE CUTS IN PAY! Price reductions will bring values down in your own market area!
NOTE: Some agents have brought up the fact that (with the higher sales price) the buyers will pay more in property taxes. That’s true. In most states, that will average around 1.25% per year ($52/mo.) In other states, it could be higher or lower. However, keep in mind that the seller nets roughly $35,000 MORE using the buydown, and sales commissions are roughly $1,250 more too! Only you and your seller can determine which route makes more sense for the situation, but we believe the first reaction should never be a price reduction.
Let’s talk about what a buydown IS exactly.
With the recent increases in interest rates, financing is on everyone’s minds when discussing what direction the real estate market is headed. Buyers are nervous, sellers are nervous, and agents are regularly resorting to price reductions to help salvage their listings. It’s funny, isn’t it? As an industry, we HATE hearing about housing prices going down, but WE’RE often the ones recommending the price reductions to our sellers!!
Maybe what we should be doing FIRST is figuring out ways to simply SELL THE HOME…and there are better ways to do that than just reducing the price!
Ask yourself this question: Is it better to reduce the sales price but give the buyer higher monthly payments and tougher qualifying? Or does it make more sense to reduce their monthly payments, and make it easier for them to qualify…even if that mean the sales price is higher (which also means you’re helping the seller net more too!)
Enter Buydowns.
Buydowns come in two flavors…temporary…and permanent. They’re exactly what their names imply. A temporary buydown typically lasts two years and offers the lowest monthly payments to start. The most common is a 2-1 buydown, where the first year payments are TWO PERCENT lower than the rate on the loan, and the second year payments are ONE PERCENT lower (hence the name 2-1). The buyer must still qualify at the current note rate on the loan, but their payments are drastically reduced!
A permanent buydown, on the other hand, is exactly what its name implies. The interest rate is bought down for the life of the loan (typically 1% lower than current rates). While the payments aren’t quite as low as the temporary buydown for the first year, they’re still lower than when you reduce the price but keep the rate high. The buyers also qualify using the bought-down rate on a permanent buydown, meaning more buyers can qualify to buy your listing!!
Let everyone else do price reductions.
While you stand out from the crowd!
All you have to do is let everyone know that your listings are different!
On the MLS, perhaps start your description off with:
“With interest rates moving up…the sellers of this gorgeous home have agreed to contribute a sizable amount toward your monthly mortgage payments! Call me for details!”
You may need to add a disclaimer somewhere (the offer of a bought down rate depends on final selling price, loan availability, etc. – check with your broker)…but that one sentence — placed at the beginning of your description so that it’s read by most buyers — will automatically make YOUR listing stand out from the hundreds of price reductions!
What kinds of loans can you do temporary buydowns on?
Temporary buydowns are available on FHA, VA, and conforming conventional loans, but not all lenders are doing them. We’re putting together a list, so feel free to call! You’ll also need to see if your lender is offering them on non-conforming jumbo loans (still a bit rare). Buydowns are completely safe, and they’ve been around for ages, but they haven’t been a regular staple over the last 15 years due to interest rates being lower than ever!
Wait a second!! You’re a brochure company…why are you talking about this?
One of our managing partners spent over 15 years in the mortgage industry in Southern California (back when rates had climbed to 17%…yikes!) He’s done hundreds of buydowns! But there are loan officers nowadays who’ve never done one and aren’t familiar with them at all, as these types of loans haven’t been “a thing” since they began their career. It’s important to know that a temporary buydown does NOT change the note rate on the loan. It only affects the PAYMENT rate. Only a permanent buydown will change the actual note rate. The most common type of temporary buydown is the “2-1” buydown, although some lenders offer other variants like a 1-1 buydown, or even a 1 buydown.
With a TEMPORARY buydown, the funds are deposited into an escrow buydown account which is set up by the lender. The full payment on the loan is actually due each month…BUT the buyer only makes part of that payment…and the rest comes out of the escrow account that the seller contributed to. Years ago, lenders were able to qualify the buyer at the lower rate if the buydown was for at least two years, but that’s no longer the case. Nowadays, the buyer must still qualify at the full note rate on a temporary buydown. Consider using the PERMANENT buydown if you want buyers to be able to qualify at the lower rate.
If you’d like to talk about it, give us a call!! We’re kind of fun to talk to…and will try to answer any and all of your questions!
IMPORTANT! IMPORTANT! IMPORTANT!
It’s never too late to be a hero! Even if you’ve recently already done a price reduction, you can always go back to your sellers and say:
“Steve…Brandy…I came across an idea that can possibly help us not only sell your home, but also put a bunch of money back into your pocket! It might even allow us to reset the price back to where we were prior to reducing the price (or very close to it). Can I tell you about it?”
Steve & Brandy: “Oh my gosh…YES!!!!“
Okay…it’s called a “Buydown” and it lowers the buyers’ monthly payments by a much greater amount than even by doing a substantial price reduction! PLUS, it hardly costs you anything compared to reducing the price! And with more than half of the properties on the market currently doing price reductions…this will make YOUR PROPERTY STAND OUT FROM THE CROWD! It doesn’t mean we’ll never have to revisit reducing the price again, but I think we should give this a shot for a while. Here, let me show you exactly how it works.”
NOTE: The only “down side” is that online real estate sites (Zillow, Homes.com, Redfin, etc.) all display the pricing history of properties currently for sale, meaning that it will show your original listed price, your price reduction, and then your price back up again. If a buyer brings that up, the best way to answer would be to say:
“Yes, we found an awesome financing option that allows buyers to save a fortune on their monthly payments versus doing a price reduction. Can I tell you how it works?”
Happy Successful Selling!
NOTE: We recognize that some price reductions are simply “corrections” of unrealistic pricing from the get-go. You may have had a seller who wanted to “test the water” at $800,000 even though your CMA suggested $700,000. That kind of price reduction isn’t quite what we’re referring to above. We just wanted to clarify that we realize all price reductions are not created equal and the suggestions made above may not work in all situations.
