Incentives Can Certainly Help, But Some Have Downsides

A realtor shows a home to potential buyers.

Incentives may be tempting to take when buying a home, but there are some downsides and tricks to these incentives

Incentives proffered by builders to entice buyers to purchase their houses are a nice bonus if you’ve found your dream home. But if you are thinking about buying the place just because of the free add-ons, think again.

Yes, financial assistance, upgraded kitchen cabinets or a finished basement are wonderful extras, especially if you won’t be able to afford them once you move in. And the idea of getting “something for nothing” is, indeed, tempting, which is why builders offer them in the first place.

But you are best served by taking a long, hard look at what’s being offered, especially if you are settling on a second, third or even fourth choice just to score some unexpected, non-essential give-ways.

Buying a house is a long-term investment and an emotional experience like no other, save for maybe buying your first new car or watching your children being born. So take as much of the excitement out of the equation as you can so you can make sound decisions.

“So many builders are offering discounts and incentives that buyers have not only come to expect them, but they’ve elevated them to a position of utmost importance,” warns Bob Shultz, a Florida-based new home sales consultant. “Instead of focusing on what they want and the overall value in a home, they walk into the sales office fishing for the best discount they can find.”

A much better strategy is to, first, try to ascertain if the builder has jacked his house prices to cover the cost of whatever temptation he is offering. If he did, you might want to move on to another builder who is not trying to hide behind his supposed magnanimity.

Also realize the value the builder places on his “freebies” is very often highly inflated. Most likely, he pays half or less for the kitchen upgrades he says are worth, say, $25,000. So what you are really getting is a $12,000-$13,000 kitchen, not a marked-up $25,000 one.

 And beware of this catch: You must use the builder’s in-house mortgage unit or an outside lender of his choice to qualify for the incentives. In the fine print of a recent ad in the Washington, D.C., area, for example, Lennar offered up to $70,000 in incentives, like help with closing costs, options and upgrades and price reductions, as long as you sign a contract in September, and as long as you use the big builder’s lender.

There is nothing wrong with using the builder’s lender, but you may be able to score better terms by looking elsewhere. Over the long haul, a lower rate or no prepayment penalties may save more in interest than what the builder is extending to you.

 All this said, let’s take a look at some of the incentives you might run into:

Virtually no builders anymore offer free vacations, free cars or even free boats to help move product, according to a survey by the National Association of Home Builders in 2014, the last-time the trade group ranked incentives in order of popularity – among builders, not buyers.

 They rarely ever offer to delay or even pay a buyer’s mortgage payments for three or four months, either, at least not like they once did. They don’t promise to buy-back the house you purchase from them at its original price.

The poll didn’t venture into why these perks have dropped off the list, but it could be that buyers saw through them as offering very little in the way of adding value to their new homes.

 A free trip to the Bahamas or a free shiny new Cadillac in the garage don’t add value, either, which is why only 1 percent of the builders surveyed offer them. The same goes for offers to match any future price reductions should the builder lower his prices after you have signed on the bottom line. 

Two other incentives – trade-in programs and mortgage rate buy-downs – were offered by only 3 percent of all builders four years ago. But, with more and more homes on the market these days and as loan costs continue to inch upward, you can expect to see these fringe benefits put on the table more often.

With a buy-down, the builders pays the lender to trim your rate for the first few years of your loan. A three-year buy-down, for example, might offer to cut your rate 1.5 percentage points in the first year, 1 point in the second year and half-a-point in the third. Starting in the fourth year, you would start paying the rate that was in effect when you first took out the mortgage.

With interest rates ticking higher – they are expected to reach the 5 percent range by early 2019 – a buy-down is a nice bene, to be sure. But again, you might be required to use the builder’s lender to qualify. If you shop around, you might be able to score a lower rate with another lender and save more. A recent survey by LendingTree found borrowers could save a median of $30,329 in interest over the life of a 30-year, $300,000 loan by shopping for the best rates.

Buy-downs actually cost builders money, although probably not as much it would cost individual sellers, which is why they rarely offer them. If the lender is a subsidiary of the builder, it’s probably just an accounting step.

A trade-in program in the housing sector is exactly the same as it is in the automobile business. The builder takes your house in trade as part of what you are paying for his house. But beware that your builder doesn’t lowball the value of your place. Yes, he’ll absorb the cost of selling your house, but that isn’t enough to pay you just 50-60 percent of what it’s worth.

In 2014, 14 percent of the builders polled saw the value of offering to help buyers sell their current homes. But that percentage is very likely to increase as more and more companies like Offerpad and Opendoor emerge and grow to take the hassle out of selling -- at a discount, of course. Just imagine; no open house, no need to keep your house sparkling clean, no need to make repairs, no nothing. Just sign and your house is sold.

On the flip side, options and upgrades at no or a reduced cost are always popular among builders. Usually up to a certain amount. Again, the builder’s cost for the items you pick may not be the same as the value he places on them.

So check around, you might be able to install a better refrigerator at a far better price after you move in. Realize that seller concessions like these and other incentives must be taken into account by the lender’s appraiser. Consequently, the value of your house may not be as high as you think.

Some builders cut their prices, which eats into their margins. But, this, too, also eats into the value of your home.

Another popular perk: The builder will pay your closing costs. Some, but not as many, also will absorb any points you pay to obtain financing. (A point is 1 percent of the loan amount.)

It’s always nice to get some extra help, especially when cash is in short supply. But again, this offer is usually tied to using the builder’s preferred lender.

Incentives have the good and bad points. Whatever you decide, don’t fall for such statements as “only available for a short period of time” or “you must sign a contract by the end of the weekend.” If you are not ready to make a decision, don’t be pushed. Incentives are offered all the time, not just in times of distress.

“Incentives don't disappear, even in the best of times," says Steve Melman, director of economic services at the NAHB. "Even in the good times, builders will throw things in.”

Finally, realize your builder may be willing to negotiate something besides what he is offering. If you don’t want better cabinets or a basement rec area, for instance, maybe he will buy down your loan rate, as long as his cost doesn’t exceed the cost of the incentives he is offering.

Lew Sichelman is a nationally syndicated housing and real estate columnist. He has covered the real estate beat for more than 50 years.

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