By Paul Boyd
They may be beautiful and seem irresistible, but watch out.
Incentives are becoming more common in today’s real estate market. The National Association of Home Builders recently reported that 55 percent of U.S. home builders offer incentives, up from 37 percent a year ago. But it’s not as simple as giving buyers a free plasma TV, because restrictions apply, and agents need to know the game rules of home negotiation.
Soft incentives are money given toward the buyer, in the form of credits towards closing costs or points to buy down interest rates. Hard incentives are tangible items such as plasma TVs, premium appliances and free parking spots. While soft incentives aren’t as exciting as receiving a new car, there is something compelling to them: They’re legal. Many sellers don’t realize when they offer buyers a larger incentive, such as a free car, that the transaction lender is unaware of the secret bonus given at the close of the sale that results in a compromised loan. To guard against this, an agent is required to present the value of a seller’s concession to a lender, so the lender can appropriately assess the value of the property. Offering large gifts “under the table” steps a fine line around fraud, and agents should avoid such behavior, even if doing so prevents a sale.
Soft incentives are accepted by lenders, because they have specific guidelines set by federal underwriting rules to standardize the process throughout different housing markets. This ensures that appraisers evaluate homes equally. Without this assurance, homes would have inflated sale prices from non-real estate incentives. This would affect future buyers, who would think the home was overpriced unless there was yet another incentive.
In my 30 years of experience in the housing market, I have seen a lot of mistakes made on the negotiation table. Here’s an example: A buyer was interested in an $800,000 property and was presenting all kinds of imaginative ways to get a larger kickback than was justified. He and his agent collaborated with a mortgage broker and asked the seller to price the house at $850,000 so that he could get $50,000 cash back to finance his down payment. The mortgage broker agreed and tried to place the loan. Things turned sticky when an appraiser entered the picture.
The appraiser evaluated the house to be worth only $800,000 and, not wanting to risk his license, refused to evaluate it any higher. A second appraisal yielded the same results. This left the buyer at a loss: He had already signed a contract with the seller and put down earnest money, yet he couldn’t pay the 20 percent down payment without the $50,000 infusion from the seller.
Not surprisingly, the sale fell through. The buyer lost his $50,000 worth of earnest money and went on to sue his agent for not warning him of the dangers of a scheme. Although the lawsuit was dropped on account of insufficient evidence, the agent’s reputation never recovered. The seller eventually sold the house for its original $800,000 value and pocketed the $50,000 in earnest money from the first buyer. Moral of the story? Play by the lender’s rules, and don’t try to defraud the system.
I’ll contrast that story with a happier one. I worked with a developer-architect who loved to renovate and restore homes. I helped him find the property for one of his earliest projects, a beautiful rehabilitation. When it came time to sell, he tried marketing it himself for three months at $450,000, but no buyers came. The developer knew that $450,000 was a bit high, but felt that his reputation was on the line and didn’t want to dip below $400,000.
I took over the listing, and the first thing we did was furnish it. After that, we held an open house, and a buyer immediately fell in love with it. The buyer made an offer for $380,000, to which we countered with $410,000. After a series of back-and-forth, we were at a standstill between $390,000 and $405,000. Neither wanted to budge because, although the buyer knew that the house wasn’t worth $400,000, the seller’s pride as a developer hinged on him staying above $400,000.
I realized there was a way to sell the house for $400,000 and $390,000 at the same time. By showing $400,000 as the gross price, then offering $10,000 worth of credits towards closing costs, the developer saved face and the buyer got his $390,000 value. The deal was a hit with everyone, including the lender, proving that a good agent doesn’t jeopardize anyone when engaging in creative financing.
Paul Boyd is assistant branch manager for Coldwell Banker Residential Brokerage, Lincoln Park Plaza. Visit coldwellbankeronline.com for more information.