Other than lowering the asking price, there isn’t much a seller can do to compete with other sellers for a buyer. They can’t throw in extras or upgrades like builders can, for example, or toss aside premiums for wooded lots.

But sellers can go toe-to-toe with anyone, including builders, when it comes to financing. In fact, they can go even further than most builders do. What’s more, they might find that helping would-be buyers qualify for a mortgage or trimming their monthly house payments might prove a much better alternative than cutting their prices — and at a lower cost.

What we’re talking about here is an interest-rate buy-down, which is usually one of the first tactics builders use to stimulate activity when sales start to slow. Individual sellers, on the other hand, rarely turn to buy-downs as a sales stimulus. Not because the move doesn’t work for them, but because they don’t realize the option is available.

“Most sellers don’t know they can do this, and they really don’t understand the concept,” said Joe Carroll of Metrocities Mortgage, a mortgage banking company in Sherman Oaks (Los Angeles County). “But once they get it, they jump on board because they are anxious to set themselves apart from their competition.”

A buy-down is a tactic in which the seller pays a lender to lower the buyer’s rate. Although the rate can be bought down for the life of the mortgage, it is far more common to see sellers buy down the rate for the first two or three years of the mortgage. This financial tool all but disappears from mortgage menus during strong markets. After all, who needs them when potential buyers are knocking down doors to become home owners? But when the going gets tough, buy-downs return with a vengeance.

The object of a temporary buy-down is to bring the initial rate down to a point where the buyer can either qualify for financing or can’t resist the lower monthly payment. Generally, they come in two versions:

– 3-2-1 — Under this model, the rate is bought down by the sellers to three percentage points below the market for the first year, 2 points for the second year and 1 point for the third.

– 2-1 — This truncated version works the same way except that the rate is bought down by two percentage points in the first year and 1 point for the second year.

In both cases, once the buy-down period ends, the rate returns to where it would have been had there been no reduction. So, if the market rate for a fixed-rate loan is 6 percent, a 3-2-1 buy-down would result in a 3 percent start rate. Then, the rate would move to 4 percent during the second year and 5 percent for the third. After three years, the rate would be back to 6 percent for the remaining term.

A third version is a permanent one in which the rate is bought down just enough to make the property stand out — but for the entire life of the loan.

Buy-downs aren’t cheap, and they come right off the seller’s bottom line. But in the long run, they achieve the same result — that is, lowering the monthly payment — as cutting your asking price. But the seller’s bottom line takes far less of a hit with a buy-down than with a drop in price.

Better yet, you don’t have to pay for it in advance, so there’s no cash out of pocket. “You don’t have to do anything up front,” says Carroll of Metrocities, who is seeing renewed interest in the financing tool. “It’s all done at the closing.”

Perhaps the most difficult hurdle for the seller to get over when considering a buy-down is that it’s expensive. But “think net,” suggests Carroll.

Here’s an example of a 2-1 buy-down for a $250,000 mortgage, with a start rate for a 30-year fixed loan that would otherwise be 6.25 percent. For simplicity purposes, assume the loan represents 90 percent of the purchase price. Thus, the selling price would be $277,778.

In year one of the $250,000 loan, the rate would be 4.25 percent, resulting in a payment of $1,230 for principal and interest. In year two, the rate would move to 5.25 percent and the payment would increase by $151 a month to $1,381. Then, beginning in year three, the rate would be back at 6.25 percent and the payment would rise to $1,540.

Over the two-year buy-down period, the savings to the buyer would be $5,628. That also would roughly be what it would cost the seller to buy-down the rate on behalf of the buyer. But for the buyer to achieve the same $1,230 initial payment, the seller would have to lower his price from $277,778 to $221,963 — or $55,815.

Those are some huge differences — $55,815 versus $5,628. And some people would say that temporary buy-downs cost sellers too much in comparison to somewhat meager savings achieved by the buyer.

So let’s look at a permanent buy-down, say 1 percentage point over the entire life of the loan. We’ll use the same example as above; that is, a loan amount of $250,000. But this time, the rate would be 5.25 percent for full term of the loan instead of 6.25 percent.

Carroll says it would cost the seller about 4 points (a point is 1 percent of the loan amount) to buy down the rate by 1 percentage point for 30 years. So it would cost about $10,000 for a $250,000 mortgage.

But the savings to the buyer are much more substantial — $54,360 over the life of the $250,000 loan — and more than enough to attract potential purchasers. For the buyer to achieve the same savings by paying less for the $277,778 house, the one with the 90 percent, $250,000 mortgage, the seller would have to lower the selling price by $28,566 — to $249,212.

In other words, to achieve the same result in this example with a buy-down as with a lower price, the difference favors the buy-down. It costs $18,566 less to buy-down the rate on a $250,000 mortgage than to lower the price.

Source:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/05/20/REGNLPTP0P1.DTL