New Home Builder Incentives and Seller Concessions
The new home builder profit Is often in the upgrades
Buying a brand new home from a builder comes with its own set of rules. The first thing to do is hire your own agent. If you don't, you may get lured into all kinds of luxury incentives and upgrades with too many strings attached and no third party looking out for your interests.
Builder Upgrade Incentives
Regardless of the type of market, whether it's a seller's market or a buyer's market, new home builders often offer upgrade incentives. The free upgrades, however, almost always come with a catch. The builder may agree to the upgrade in exchange for you to do one or more of the following:
- Buy immediately: If you're not ready to make an offer, don't be pushed into making a decision you may later regret. They might tell you a deal this good can't wait, but it can, unless it's the last home available.
- Make a sizable earnest money deposit: Read your contract. Your earnest money deposit may not be refundable for any reason at any time. Ask your agent about the possibility of a refund.
- Hire the builder's agent to sell your existing home: You may be better off hiring a neighborhood specialist to sell your home than hiring a listing agent who doesn't sell in your area. Your local agent will have knowledge the builder agent doesn't possess and will probably fight harder to maximize your profit.
- Use the builder's lending institution: The result could be a higher interest rate and less favorable loan terms. Builders like to insist buyers get pre-qualified through their own lender to make sure you can get a loan.
- Pay list price: If you pay $50,000 more for the home and get $10,000 in free upgrades, you're still out of pocket $40,000. If it's mortgaged, you pay interest on it.
The upgrades the builder offers you may cost you more in the long run. New home builders aren't in the charity business. They want to make a profit. Realize that much of the builder's mark-up is in upgrades, because the builder purchases materials and appliances in bulk or at wholesale. So, you're getting a retail trade, and the builder is still making a profit from you.
Luxury Freebies and Enticements
You can bet the new home builder has access to wholesale pricing for any luxury freebies. You might be able to get a discount if you bought these items yourself:
- Free Vacations: The builder may advertise "Free Cruise to Tahiti Worth $10,000." Verify the cost of that cruise through other travel agencies. Moreover, ask yourself if you would otherwise buy a Tahitian cruise. If the answer is no, you would not fork out cash for that trip, then pass it by.
- Free Cars: Most of the free car giveaways that builders advertise are not an outright gift of a new car. They are leases. A leased vehicle must be returned to the dealer at the end of the lease, which is typically two to three years. You are receiving the right to drive a vehicle, not own a vehicle, plus you might pay higher insurance premiums for the privilege. You may also be faced with fees at lease termination, especially if you have exceeded the mileage limitations or damaged the vehicle.
- Free Entertainment Centers: Whether it's a big-screen smart TV or a home theater surround system, electronics quickly depreciate and their values are all over the board. Shop for your own and you may find models costing thousands less than the builder's inflated value.
Anything the seller gives you is an item you are paying for. The cost is figured into the sales price. It's one thing if you agree, for example, to pay $200,000 for a home and, after the fact, the seller offers to pay 3% of your closing costs. But that's rarely how it works. Typically, you make an offer first, and in that offer you ask for a 3% concession. If the seller accepts that offer, you could have just as easily purchased that home for 3% less. Do you really want to finance your own closing costs for 30 years?
Instead, compare the cost of those items. For example:
- Prepaid Property Taxes: In California, a $200,000 home might incur a property tax bill of $2,500 a year.
- Prepaid Association Dues: If your dues are $100 per month, that's $1,200 a year. Is a free year of homeowner association dues worth anything in trade?
- Interest Rate Buy Downs: If you do a mortgage buydown, that buy-down fee is figured into your mortgage balance, and the buydown might be in effect for only a few years, not the full term of your loan.
- Discount Points: Each loan point is equal to 1% of your loan balance. On a $200,000 mortgage, that amount is $2,000.
- Prepaid Closing Costs: Most lenders will not let a buyer receive more than a 3% credit toward closing costs. On $200,000, that sum is $6,000. It's generally to your advantage to pay closing costs in cash, plus, some of it is tax deductible.
Run the numbers on these free incentives and concessions before you buy. Be a smart home buyer.