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Video — Agent Secrets — How To Handle Builder Incentives

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New-home builders frequently offer additional terms to help close sales quickly; these are usually called "incentives." Incentives are frequently used at critical times, like the end of a financial period, or for particular models or lots. Here are some of the most common:

Cost-reduction incentives reduct short-term or up-front costs. For example, a builder might use a cash contribution to closing, or waiver of premiums on the lot, as cost-reduction incentives.

Value-add incentives provide upgrades to the home being purchased. A decorating allowance to upgrade appliances, floors or fixtures is a common value-add.

Value-to-buyer incentives are not necessarily connected to the house, but they are of value to the buyer. A trip to Hawaii, a car lease, or a big-screen television are all examples of this.

Time-to-close incentives speed up the process. For example, if the builder has arrangements with a lender, with details of their project and models already in place, the buying process could be accelerated.

While incentives can be emotionally tempting, try to evaluate them neutrally. Would you BUY the item or addition? What will it actually cost over time as part of the mortgage? Is the price fair or inflated? With lender arrangements, ensure that the terms are still fair compared to market terms.

As a final check, get advice from your real estate agent or certified new-home cobroker.

One Great Secret to Getting a Deal on a New-Construction Home: Incentives

When people want to buy a house, one of the first things they learn is that the price listed on real estate listings is almost always negotiable. The same level of adaptability is also available to buyers of newly built homes through the incentives that builders offer.

Builder incentives are promotions that are given out by developers. They work a lot like coupons in that they lower the price of buying a home in the area where they are located. In today's market, discounts are becoming more common as a way to get cash-strapped customers to buy something. However, not all discounts are as simple as lowering the price.

The tips below will help people who want to buy a home learn about the different types of incentives, when and why they are given, and how to make the most of these deals right now.

What are builder incentives, and when are they given out?

Builders use eye-catching billboards and the Internet to spread the word about the many incentives they offer to buyers in order to get them to buy. You could say something like, "Get $5,000 in designer upgrades for a limited time!" or "Buy before X date and we'll pay for all of your closing costs." These are also ways to get people to buy something.

Homebuilders could offer incentives at any time during the process of building a project. A lot of them happen when a new community opens for the first time to get people excited about the new place and to help find the first few residents. Builders often offer incentives at the end of a project, when there are only a few homes left to sell, because they may want to close the books at this point.

There's a chance that things like high interest rates or a recession, which could make it harder for people to buy homes, could also make builders work harder to get people through the door. The type of incentive will depend on what builders think their ideal homebuyer will respond to most strongly at that particular time.

If the economy is failing, lower interest rates and cash at closing may help buyers qualify who otherwise couldn't afford a certain location. Upgrades to the property are more likely to work if it is a high-end neighborhood.

Even though many incentives are widely known, some are not, and it is up to the sponsor to offer them. Prospective buyers can only find out if this incentive is available by asking about it themselves or through their real estate agent.

Builders sometimes have some wiggle room to give a buyer something like a refrigerator—new construction doesn't always come with one—or blinds or something along those lines to encourage a buyer to move within a certain time frame, like by the end of the month or quarter. If the builder has wiggle room, the builder's sales reps will know how to answer the question, and they are usually happy to help the buyer as much as possible to make the sale.

How builder's incentives are actually used

Builders may also offer to buy down the interest rate on the home loan or pay some or all of the closing costs to help homebuyers save money on financing. Builder incentives can come in the form of price cuts on the house itself, but they are more likely to come in the form of help with financing costs.

But it's important to remember that most of the time, these agreements are only valid if the buyer gets financing through the builder's preferred lender. Builders often try to get along well with certain lenders because they want to make sure that the loan will be closed on time after the house is built.

Remember, it costs a lot to leave a finished house sitting unsold, so the builder wants to get rid of it as soon as possible.

Even though buyers always have the option of bringing in a lender of their own choosing, doing so usually means they lose any financing incentives from the builder and may have to pay more when the deal is done.

The buyer may have to pay all of the closing costs, which could add as much as 3% to the price of the home. Despite that, it's always a good idea to shop around and compare offers from a number of different lenders or brokers, just to make sure that the builder's terms are really the best deal you can get.

Homebuyers who find better financing terms with an outside lender should know that if the loan isn't ready to close when the builder is ready to hand over the house, the buyers could have to pay penalties that could add up to hundreds of dollars per day. If a buyer finds better financing terms with a lender outside of the bank, they should know this.

Buyers should read the fine print of any incentive they agree to because it may have small conditions that are easy to miss in the rush to close the deal. Incentives might come with a catch, like a'must close by date.' Buyers should get a written explanation of what will happen if the house isn't done by the end of that time range.

There is also a chance that problems with the mortgage approval process could slow down or stop a home loan from going through. These problems could happen if the buyer suddenly changes jobs at the last minute or buys something big, like a car. Most of the time, the best thing to do is to get to the closing table without having made any big changes to your finances in the past few months.

Why builders incentives come and go

During the COVID-19 epidemic, when record numbers of Americans were moving, the housing market was red hot, and builders didn't have to offer many (or any) incentives for the homes they were building because so many people were moving. But now that things are starting to get back to normal, homebuyers are starting to see a few more benefits coming their way.

In general, builders are in the same situation as other home sellers when it comes to pricing. Home buyers are interested, but higher mortgage rates make homes much less affordable.

How to Use Today's Builder Incentive Programs to Their Fullest

When interest rates are high, most builder incentives focus on making buyers' monthly payments more affordable.

One incentive that could be given is a permanent buy-down of the interest rate, which is paid for by the builder and gives buyers a lower monthly payment and lower financing costs over the life of the loan. The builder might offer this buy-down. Longer interest rate locks, which are paid for by builders, are also being used as an incentive. With these locks, people who want to buy a home can lock in the current interest rates and protect themselves from future rate hikes.

Some builders bought "rate locks" when interest rates were lower than they are now, so they can offer loans to their buyers at lower rates than the current market rates. Buyers who are worried about the current interest rates may want to look for builders who already bought rate locks before mortgage interest rates started to go up.

Most incentive programs have a limit on how much money they can give. Because of this, we recommend that buyers who are ready to move take advantage of a good incentive when they find one.


Author
Nichole Robertson
Lead Editor
January 27, 2023
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