An old technique to sell in an overloaded market
Selling a property was hardly stressful just a couple of years ago as buyers were entering the market in a frenzy of what seemed like every available property was the last one left on earth.
Now that the market has come to its senses and is falling back a little (possibly a lot), sellers have to be creative to create a transaction. Many sellers try slashing their prices, but this often is not enough to gain attention and may be too steep that it begs the question: What’s wrong?
As a result, many sellers are reverting back to old techniques that became useful in the 1980’s when the market was in one of its worst periods in history.
The October 9, 2006 Realty Times article, “Mortgage Rate ‘Buydowns’ Can Sell Houses in Slow Markets” written by Kenneth R. Harney, provides this time-tested method that may cost you a little upfront, but will save you time and money in the long run.
So, what exactly does it mean for a seller to offer a “buydown” incentive?
“Rather than lower the asking price on a house by thousands of dollars, a seller can offer a discounted rate package that lowers purchasers’ effective interest costs and monthly payments during the early years of their loans.”
There are numerous ways to offer buydowns, as they are mainly dependant on the seller’s personal preference. However, the most notable form of buydown in the 1980s was a “3-2-1"” on a 30-year fixed rate mortgage.
“During year one of the new purchaser's mortgage, the seller agrees to pay 3 percentage points of the interest rate on the mortgage note. During the second year, the sellers pays 2 percent, and in year three the seller pays 1 percent. After that, the purchasers pay the full note rate.”
This will greatly increase the marketability of your home since the monthly mortgage payment is usually just as concerning to the buyer as the overall purchase price is.
For example if a house originally had an asking price of $210,000, the seller could try to lower the price to $200,000 or offer a “3-2-1” buydown on the $210,000 listed price. The buydown feature is a lot more attractive.
“In year one, the purchaser's 6.5 percent rate would be subsidized down to 3.5 percent by the seller, creating a monthly payment of $898.09 for the purchaser, instead of the full $1,264.14 principal and interest. The seller's outlay for the subsidy would come to $366.05 a month, or $4,392.56 for the full year.”
The second year would result in a 4.5 percent interest rate, or only $1,013.37 per month. The seller would consequently be spending $250.77 per month or $3,009.20 for the full year.
“In the third year, the purchaser would be paying at a 5.5 percent rate, or $1,135.58. The seller would contribute $128.14 a month for a total of $1,542 for the year.”
So, the “3-2-1” buydown offer will eventually cost the seller $8,999.44, which would save the seller over $1,000 if he or she just reduced the asking price by a flat $10,000. The buydown is also much more beneficial for the buyer because it lowers their monthly mortgage payment for the first three years, and their monthly payment is pretty much their only concern.
Offering a buydown may be annoying because you will have to make small monthly payments for three years, but it will help you sell your home quicker and eventually for more money.
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