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Rate Buydowns Instead of Price Reductions; BETTER for Everyone!

Rate Buydowns Instead of Price Reductions; BETTER for Everyone!

We are starting to see a lot of stale listings at the higher end of the market.

This is b/c “slow season” is starting and b/c the high-end market seems to be slowing in general due to affordability issues and anxieties about the market overall.

As a result, we are seeing frequent price reductions that often hurt everyone, e.g. properties get stigmatized as “overpriced” and/or stale and still end up sitting on the market; sellers make less money; and the price point of the neighborhood as a whole comes down – impacting appraisals, other sellers and even refinancing opportunities.

A much better alternative to a price reduction is often a very generous seller-financed interest rate buydown.

I will use a $2.5 million listing in our local market as an example, as the agent just reduced the price by $100,000 to $2.4 million.

Today’s “no points” interest rate for a strong borrower purchasing that property for $2.5 million with 25% down would be 3.625%.

But, if the seller credits 3 points to the buyer to buy down the interest rate, the buyer would instead get a 2.875% interest rate.

The 3 point credit would cost the seller $56,250 and the buyer’s monthly payment would end up $770 LOWER than it would be at 3.625% (today’s “no points” rate).

In contrast, if the buyer buys the house for $2.4 million (with no seller credit for a rate buydown) at today’s market rate of 3.625%, his payment would $320 HIGHER than it would be at the higher price with the rate buydown.

In other words, the buyer is better off from a payment perspective if he buys at the higher price with a rate buydown.

The seller is better off b/c he is out of pocket only $56,000 (for the seller credit/rate buydown) instead of the $100,000 for the price reduction.

And the neighborhood is better off b/c the overall neighborhood price point remains higher.

Some listing agents are using sign riders to tout the very low fixed rates (in the 2% range) to attract buyers. Please let us know if you’d like more information in regard to this.

The tables below further illustrate how this can work.

ORIGINAL PRICE AT CURRENT MARKET RATE (“NO POINTS”)

PRICE:$2.5 million
DOWN:25%
LOAN:$1.875,000
NO POINTS RATE: 3.625%*
EST. TOTAL PAYMENT: $11,360

ORIGINAL PRICE WITH 3 POINT SELLER-PAID BUYDOWN

PRICE:$2.5 million
DOWN: 25%
LOAN: $1.875,000
3 POINT RATE: 2.875%*
EST. TOTAL PAYMENT: $10.590 ($770 LOWER than the above scenario)

REDUCED PRICE AT CURRENT MARKET RATE (“NO POINTS”)

PRICE:$2.4 million
DOWN:25%
LOAN:$1.800,000
NO POINTS RATE:3.625%
EST. TOTAL PAYMENT:$10,910 ($320 HIGHER than the above scenario at the higher price and lower rate)

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 01524255, NMLS# 335646