Developer and Builder Incentives
Understanding How Not to Leave Money on the Table
If you have been shopping for a new house, condo or townhome, it is possible that you are thoroughly mystified by all of the different developer and builder incentives that are being offered right now. I have been a Home Mortgage Consultant for Wells Fargo for about 10 years and have worked with these developers for the majority of my career. I have seen the homebuilder industry and sales strategies change quite a bit during that time. My goal of this article is to generally define the philosophy of these incentives, illustrate how they work and show how you can maximize these incentives for your individual situation.
Just a few short years ago when the developers were rocking and rolling with the rest of the real estate market, deals were almost non-existent or so minimal that the deal really wouldn’t effect a buyer’s decision. When the housing market started to slow, developers have had to create incentives to get people through the door. At first, you would see pure cash discounts on new homes. After a while, you would go through the housing section of the newspaper and $30k off just didn’t have the impact that it once did because almost every developer was offering it. This brings me to the point where the developers are now and have started to get really creative.
I see developers offering everything from “free college” to a new Mercedes Benz if you purchase their property. Some of the incentives have become so complicated you would need a finance degree to decipher them. How do they come up with these incentives? The developer and the marketing people get together and the developer decides how much cash they have to apply to a promotion. They then try to come up with something unique to attach it to and promote. They will usually position the promotion to what they think their buyer profile is and make appeal to as many people as possible. So, if the developer is building homes in a single family neighborhood in the suburbs, they may think that “free college tuition” will get the most people through the door of their models. However, at the end of the day, the developer really doesn’t care if you take the exact incentive that is being offered in most cases. They are looking at the bottom line and will do whatever it takes to make the deal. The incentive to the developer is all about the bottom line and not about you taking the specific incentive.
So when you are shopping, you shouldn’t buy or shop the developer and builder incentives themselves. You should concentrate on finding the best home for you or for you and your family. If you are working with an experienced Mortgage Consultant and Realtor®, they will help you work with the seller and structure the incentive the way it best fits you. Remember, there is a price tag attached to every incentive. If you are a single professional, you probably don’t need “free college.” The price tag the developer attached to that promotion may be $20k. There are many things to do with that $20k. Here are a couple ideas:
- Pure discount off the sales price.
- Seller-paid closing costs.
- Seller-paid interest rate buydowns. These are very effective when shopping. Sometimes you can afford a lot more home than you think when using these buydowns. As a general rule, for every $1,000 you finance, your payment is affected by about $5.30. So when $20k is taken off of the price of a home it doesn’t make a huge impact on your monthly payment. However, when a large amount of money is used to lower your interest rate over a 30 year period, it has a much bigger impact on your payment and you can afford more home.
- Free options: These are a little tricky and sometimes you can get more in options than the price tag of the incentive that the developer has allotted. The reason is because developer options are generally marked up about 25%. So if there is a $20k incentive and you want it applied to “free options,” you may be able to get a little more because that $20k in upgrades probably costs the developer only about $15k.
In conclusion, the possibilities with applying developer and builder incentives are almost endless. When shopping, the first thing to do is pick a Realtor® and mortgage professional who have experience in dealing with new developments, knowledge of incentives and will take the time to find out what is best for you. It is not your job as a buyer to figure out all of the different incentives and calculate how they can be applied to your situation. This is the responsibility of your Realtor® and Mortgage Consultant. Remember that you are the boss! There are many options for new properties right now and the Realtor® and Mortgage Consultant work for you. It is their job to work on your behalf to dictate to the developer exactly what you want.
The preceding article is provided as a complimentary service to OwnACondo.com for general informational purposes only. It is not intended to provide a comprehensive guide to the subject discussed. The descriptions, terms and definitions contained within are solely the responsibility of the author. Contributors to this regular feature include various Chicago-area mortgage lenders. No legal suggestions or financial guidance are intended, nor should they be implied. Be sure to contact a mortgage lending professional of your choice, as well as an acountant, for more information and/or to discuss details of your specific situation.
|