by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Listing agents, considering offers might advise their sellers to counter-offer with a mortgage rate buy-down strategy rather than to reduce the sales price.
We like to help our agents with charts from our Mortgage Lens program. The chart helps to illustrate the power of leverage, to both the seller and buyer, and gives us a shot at the loan business.
(N.B.- The chart shown doesn’t match the scenario below)
Here’s a scenario designed to meet both the buyers’ and sellers’ objectives:
The property is listed at $300,000; an offer comes in at $283,000. One of the most important benefits of the lower price, to the buyer, is the lower mortgage payment. An 80% loan on $300,000 (at 5.25%) would yield a P&I mortgage payment of $1,325. Lowering the price to $283,000, would lower the loan to $224,000 and the payment to $1250/month.
Consider a mortgage rate buy-down as the counter-offer. For two discount points (about $4800), the seller could reduce the rate to 4.75% and the payment to $1251. The buyer gets the payment he wants and the mortgage rate buy-down strategy saves the seller some $12,200.
Greg Swann says:
Brilliant! We do this all the time on the buyer’s side, especially with FHA loans because we can ask for more than 3% in costs, but I hadn’t thought about it from the seller’s point of view. I’m with Al Lorenz: Reading BloodhoundBlog pays handsome dividends!
July 20, 2009 — 10:31 pm
Brian Brady says:
You could take that a step further, Greg. If a 90% conventional loan came in, the seller could offer to pay the two discount points AND the 1.75% upfront FHA MIP. The buy-down strategy now costs the seller $9,000 (an extra $4,300) and reduces the savings to $8,000 BUT…
…presented with that counter, the buyer might start thinking about a lower down payment (won’t affect the monthly MIP factor) and banking the $19,500 saved on down payment. That’s cash for: furniture, a new carpet, a paint job, a new deck, etc.
July 20, 2009 — 10:54 pm
jay says:
so I don’t have to do the math will you edit your #s for me. In one case 1250 versus 1251 for buyer payment. I’m sure that needs to be recalculated.
July 21, 2009 — 4:41 am
Tom Vanderwell says:
Hey Brian,
In an effort for full disclosure, can you run the numbers out 10 years? Assuming the buyer stays in the home for 10 years, never makes an extra payment, how do the deals match up then?
Tom
July 21, 2009 — 5:29 am
Michael Cook says:
This is a great idea from a seller perspective. Buyers should probably ask for a cash reduction and pay this themselves, but this is very creative thinking.
I hope you dont mind if I steal this idea for my new webiste. Coming in September by the way. Expect a phone call or two or five.
July 21, 2009 — 8:42 am
Brian Brady says:
“In an effort for full disclosure, can you run the numbers out 10 years?”
That’s the buyers agent’s job.
July 21, 2009 — 8:52 am
Brian Brady says:
“Buyers should probably ask for a cash reduction and pay this themselves”
and there is someone acting like the buyer’s agent should. By all means, swipe and deploy, MC.
The answer is that the balance is about $7,000 lower (in 2019 dollars) for the lower priced option versus the buy-down. My point is that the buyer didn’t hire me to give him financial advice; the listing agent did. The listing agent’s job is to give his client (the seller) an advantage in the negotiation.
July 21, 2009 — 8:59 am
Jeff Brown says:
Moral of the story?
Analysis, when done expertly, and with the lone agenda being to uncover all truth, will almost always shine its light on new realities and better yet, previously unknown options.
This is a stellar illustration.
July 21, 2009 — 9:46 am
Jim Duncan says:
Outstanding analysis, and something that I’m liable to borrow myself. I’ve thought of this from the buyer’s point of view, but for some reason hadn’t connected to the seller’s point of view …. thanks.
July 21, 2009 — 10:07 am
Al Lorenz says:
Thanks Brian! And, for my developers of condo projects, that keeps the comparable sale price up where they want it. Another nugget and it isn’t even noon yet!
July 21, 2009 — 11:09 am
Petra Norris says:
It looks like to me a win win situation for both sides of the transaction. Definitely worth including into an offer
July 21, 2009 — 1:01 pm
Rich Johnson says:
As this market changes we need to open our minds to new ideas – this is a good one.
July 21, 2009 — 1:27 pm
Tim Golden says:
Although I am not personally a real estate professional …This seems very creative!
…and having bought and sold several homes over of the years. I personally was never introduced to such a bargaining technique and if I had known it at the time, I would have at least done the math for a 5 year ownership model. …buyer or seller
I suspect that sometimes it works and sometimes it doesn’t, but at least it keeps negotiations open and with a unique spin.
July 21, 2009 — 2:30 pm
Tom Vanderwell says:
“The answer is that the balance is about $7,000 lower (in 2019 dollars) for the lower priced option versus the buy-down. My point is that the buyer didn’t hire me to give him financial advice; the listing agent did.”
So, if a buyer is only concerned about the monthly payment, or is planning on staying in the house for the entire 30 years of the loan, then it’s a good thing. If not, then the cash option might be better.
Illustrates the importance of a buyer working with a buyer’s agent and a mortgage lender who understand and can work through the details of the numerical issues.
Tom
July 21, 2009 — 6:20 pm
Barry Bevis says:
Love it- Ive been using this as a Seller Paid incentive for a while.
July 21, 2009 — 7:36 pm
Brian Brady says:
“Illustrates the importance of a buyer working with a buyer’s agent and a mortgage lender who understand and can work through the details of the numerical issues.”
One would think, Tom but most buyers only care about getting the house for “the payment”. This strategy positions us to look like heroes to both the buyer, the seller and both agents.
July 21, 2009 — 8:48 pm
Mark Jacobs says:
Great Post, Price is not everything in this market!
July 22, 2009 — 2:43 pm
Greg Dallaire says:
Brian,
You present a great option that I strongly believe buyer’s would eat up. I’m not an accountant but i’m pretty sure the buyer gets the deduction on up front points on his tax return even if the seller pays for that. Can anyone clarify that because thats even one more nugget for the pot.
Similiar mortgage payments which sadly people will eat up even if the cash is a better short term option. Combine that with a possible tax incentive you could have a really strong winner for putting together deals in the future.
July 22, 2009 — 6:30 pm
Greenville SC Real Estate says:
Definitely creative, and the buyer would see the logic, assuming they even plan on being in the house 30 years. Then again, what’s the average right now, about 5-7 years?
July 23, 2009 — 11:13 am