In down real estate markets, some new home builders offer fantasy vacations at luxury Hawaiian resorts. Others tempt buyers with a new Prius or a big screen high-definition TV, or promise free upgrades such as Black Galaxy granite counters installed without charge throughout the kitchen and baths. If you dig your toes into the dirt, they might even throw in a free in-ground swimming pool out back.
You may wonder if it's worth it to jump on these enticements. What about the concessions home sellers offer for resales? Many trumpet discounts, prepaid closing costs, free homeowner association dues for a year or offer prepayment of your property taxes. They do everything short of standing on their heads to coax buyers into pressing hard because the third copy is theirs.
Builder Upgrade Incentives
Regardless of the type of market, whether it's a seller's market or a buyer's market, builders often offer upgrade incentives. The free upgrades, however, almost always come with a catch. The builder may agree to the upgrade in exchange for you to do one or more of the following:
- Buy Immediately.
If you're not ready to make an offer, don't be pushed into making a decision you may later regret.
- Make a Sizeable Earnest Money Deposit.
Read your contract. Your earnest money deposit may not be refundable for any reason at any time.
- Hire the Builder's Agent to Sell Your Existing Home.
- Use the Builder's Lending Institution.
The government may put stop to this practice since it could violate RESPA and anti-trust laws. Plus, you may pay more in rate and get less favorable terms.
- Pay List Price.
If you pay $50,000 more for the home and get $10,000 in free upgrades, you're still out of pocket $40,000; if it's mortgaged, you pay interest on it.
The upgrades the builder offers you may cost you more in the long run. Builders aren't in the charity business. They want to make a profit. Realize that much of the builder's mark-up is in upgrades, because the builder purchases materials and appliances in bulk or at wholesale. So, you're getting a retail trade, and the builder is still making a profit on you.
Luxury Freebies and Enticements
You can bet your bottom dollar that the builder has access to wholesale pricing for those luxury freebies. You might be able to get a discount if you bought those items yourself.
- Free Vacations.
The builder may advertise, "Free Cruise to Tahiti Worth $10,000." Verify the cost of that cruise through other travel agencies. Moreover, ask yourself if you would otherwise buy a Tahitian cruise. If the answer is no, you would not fork out hard, cold cash for that trip, then pass it by.
- Free Cars.
Most of the free car giveaways that builders advertise are not an outright gift of a new car. They are leases. A leased vehicle must be returned to the dealer at the end of the lease, which is typically two to three years. You are receiving the right to drive a vehicle, not own a vehicle, plus you might pay higher insurance premiums for the privilege. You may also be faced with fees at lease termination, especially if you have exceeded the mileage limitations or damaged the vehicle.
- Free Entertainment Centers
Whether it's a big-screen TV or surround system complete with DVR and built-in speakers, electronics quickly depreciate and their values are all over the board. Would you buy your own? If so, you might find discounted models for thousands less than the builder's inflated value. Is there something wrong with your own TV?
I'm going to say this and get it over with. Anything the seller gives you is an item you are paying for. The cost is figured into the sales price. If you are financing the purchase by getting a mortgage, it most likely then financed by you. You are paying a 30-year rate for the concession privilege.
It's one thing if you agree to, say, pay $200,000 for a home and, after the fact, the seller offers to pay 3% of your closing costs. But that's rarely how it works. Typically, you make an offer first, and in that offer you ask for a 3% concession. If the seller accepts that offer, you could have just as easily purchased that home for 3% less. Do you really want to finance your own closing costs for 30 years?
Instead, compare what those items cost. For example:
- Prepaid Property Taxes.
In California, a $200,000 home might incur a property tax bill of $2,500 a year.
- Prepaid Association Dues.
If your dues are $100 per month, that's $1,200 a year.
- Interest Rate Buy Downs
If you do a mortgage buydown, that buy-down fee is figured into your mortgage balance, and the buydown might be in effect for only a few years, not the full term of your loan.
- Discount Points
Each loan point is equal to 1% of your loan balance. On a $200,000 mortgage, that amount is $2,000.
- Prepaid Closing Costs
Most lenders will not let a buyer receive more than a 3% credit toward closing costs. On $200,000, that sum is $6,000. It's generally to your advantage to pay closing costs in cash, plus some of it is tax deductible.
Remember that game that hucksters play with three cups and a ball? It's called the Shell game. A small ball is placed under a cup. The operator then shuffles the three cups while you try to figure out which cup has the ball. It's a slight-of-hand maneuver. You will never win this game. So, run the numbers on these free incentives and concessions before you buy. Be a smart home buyer.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.