Friday Mar 05 2010
Market Matters: Price shouldn't be only consideration when buying
By: Beth Mergens
In response to last week’s column, I received an interesting e-mail from a local loan broker who suggested sellers use some creativity. The broker refreshed my memory regarding price reductions versus interest rate reductions. Although the concept is hardly new, this approach is beneficial to both parties, and given this market, is a great tool for sellers looking to capture a buyer. The point was that buying down the interest rate for the buyer is less costly than a price reduction for the seller. The typical buyer has been instructed by their lender to stay within a set price range and eliminates homes above their top price. But, they should really be looking at their monthly payments. Agents can help their sellers by introducing this concept in their marketing materials. Showing buyers how they can qualify for homes previously dismissed due to price, opens up a lot more options. For example, a home priced at $500,000 with a 20-percent down payment leaves a loan amount of $400,000. Assuming the buyers have good credit, their interest rate will be around 5 percent, which equals a monthly payment of $2,814, all costs included. Now if a buyer’s offer comes in at a reduced price (let’s say $480,000), their payment will drop to $2,701, or a monthly reduction of $113. However, if the seller offers to pay down the interest rate by 5/8 of a point, the buyer’s monthly payment goes down to $2,664, or an additional savings of $37. The cost to the seller is $12,712, which puts them ahead by $7,288 with the buyer benefitting as well. The numbers show significant benefits to both parties the higher the price range. This type of solution works wonders for sellers who are trying to get their homes sold quickly because the buyers see the benefit immediately. Sellers can be competitive and avoid a price reduction, making their neighbors happy. So long as the house is priced within an acceptable market range, most appraisers will bring the value in at the offered price. This can also work with distressed properties when asking for a buyer credit to pay for closing costs. Even though sellers are not entitled to receive any cash from a short sale, this can cinch the deal for some difficult-to-sell properties. Another benefit to buyers is the accumulated savings over the life of the loan. Statistically, most people move every seven years, so if we compute the savings over a 10-year period the approximate savings totals $25,000. This is a very realistic number given the mobility of our society, so don’t discount the value of a rate reduction when negotiating your home purchase. Beth Mergens is a broker associate with Remax Gold in Folsom. She can be reached at 947-3993 or at FolsomLakeHomes.com.