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 If the forces of supply and demand are heating up the local real estate market you can't expect sellers to offer you much in the way of incentives. But if the market has been cooling off or homes are not selling quickly, you can expect sellers and builders alike to offer what are seemingly generous incentives to home buyers.
With lack-luster real estate markets in many parts of the country home builders as well as real estate agents are resorting to new extremes when it comes to offering home buyers both deep price cuts and an abundant array of incentives.
In this article we're going to explain how market forces determine the lengths builders will go to offer inducements. We're also going to cover some of the more common and extreme offerings you might see when a real estate market slows down.
Buyers and Sellers of Homes
Most real estate markets are pretty efficient. That means they normally follow the economic forces of supply and demand. When there are more buyers than sellers of homes the real estate market is said to be "hot" because homes will sell quickly. But when supply outstrips demand then builders might find themselves with a large number of unsold homes - and that can create cash flow problems.
Builders and developers make money by selling homes - not just building them. If their inventory of homes gets too large then they've got a lot of money tied up in those homes. That means they have a lot of incentive to either lower the price of the homes they're selling or throw in a special feature in the hopes of enticing home buyers to grab some of their inventory.
New Home Incentives
We're going to talk about some of the incentives that could be found in 2007 - when the housing market was struggling and home builders started to find themselves with a lot of unsold homes. You're actual experience will vary but the following examples were found in Pennsylvania, Virginia, Texas, California, Nevada and Florida.
- Mortgage Payments - builders sometimes will offer to pay up to four mortgage payments on behalf of the home's owner.
- Closing Costs - one common sweetener used by all sellers (real estate agents, homeowners as well as builders) is to offer to pay all or a share of the closing costs on a home. Typical closing costs are in the range of $5,000 to $20,000.
- Property Taxes - builders are often willing to pay the property taxes on a home after it's sold. This kind of inducement is usually in the range of six to twelve months.
- Insurance Payments - as is the case with taxes you'll often find builders or sellers willing to pre-pay a homeowners insurance policy for up to one year. If the builder provides you with this option, just make sure you agree with the policy's deductible limits or you might find yourself paying a large deductible if the home is damaged.
- "Free" Upgrades - upgrades can include granite countertops, swimming pools, hot tubs, finished basements, and appliances. When offering upgrades on a home a builder has a lot of latitude since their cost for an upgrade can be considerably lower than the average homeowner's.
- Cash Discounts / Lower Prices - as a last resort a builder might sell a home at a discount but this practice is usually frowned upon by other homeowners in the same development that have paid a premium price for their homes. Selling a home at a discount - sometimes as much as 20% - effectively establishes a new "ceiling" price for homes in that area.
Warnings about Home Incentives
Keep in mind that what seems like an incentive on the surface might actually be a shuffling of price by the builder. For example, a builder might "over-state" the value of an upgrade or simply increase the home's price before offering a "free" upgrade. Whenever evaluating an offer make sure you do your homework and find out what other deals home buyers in a particular development were offered when they purchased their homes.
Qualifying for Incentives
In a slow real estate market an agent or builder might want to, or need to, increase their cash flow in the short term. This means they are looking for buyers that meet certain conditions or qualifications. If you're looking to take advantage of an incentive offered by a builder or seller then you need to be prepared to be decisive and move quickly.
To qualify for an incentive, a buyer typically is able to:
- Close on the home in 30 days or less.
- Sign a contract to buy a home without any contingencies. For example, the purchase of a home must not be contingent upon the sale of a home the buyer already owns.
- Finally, builders are looking for buyers that are pre-qualified or have already obtained pre-approval letters of financing.
So if the market is slowing down and you're looking to take advantage of the extra bonus features a builder might be willing to throw in to sell a home make sure you've got your own "house" in order. You'll be in a much better position to negotiate with a builder if you're the kind of buyer they are looking for.
About the Author - Home Builder Incentives
Copyright © 2007 Money-Zine.com
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