3 2 1 buydowns vs price reduction, a great way to sell your home

Sounds way too confusing.  Way too many numbers. 

Pros for sellers:

1) Alternate way to market vs just dropping price below neighbor

2) Greater net from sale

3) larger pool of qualified buyers with discounted rate.

Pros for buyers:

1) lower cost of ownership in the beginning years

2) gradual increases are easily absorbed

3) fixed rate loan

Somewhat confusing? Maybe. But a good mortgage lender should be able to show this to realtors and explain how this opens up the door to more sales without putting buyers into high risk option ARM's like they were a few years ago. This is old school.  But it works. Or we can all sit around and cry that not enough buyers are qualified.

That seems like another ARM thing=get people to buy stuff they cannot really afford. Great idea!

It's not and "ARM thing". Either you know what it is or you don't ... and lack of understanding leads to false assumptions, so google  "3-2-1 temporary buydowns" and read about it.  3-2-1 buydowns are fixed rate mortgages with the interest rate "bought down" for the first few years (ie temporary buydown) allowing a buyer to qualify at a reduced rate, and gradually absorb small annual increases over a few years.  Look at the numbers on my opening statement: the temp buydown buyer ends up with a fixed pmt of $1430 vs $1344 if he'd had a price reduction instead. The Truth In Lending disclosure shows what the payment increases are going to do, and they're fixed, predetermined changes. Nothing like an option ARM, this does not go negative, there is no interest only option, the payments can't double etc. (by the way, when I used to show buyers what could really happen with option ARM's, in many cases they didn't believe it because the worst case scenarios were never disclosed.)

Another type of buydown is more common--having the buyer or seller pay points, called a permanent buydown. 

problem will be the appraisal. If your home really should be 10K cheaper, this gimic won't work. You could also just offer to pay their first year's mortgage payments, or whatever, but you'll run into the same problem: the appraisal.

I say lower the price and forget the gimics.

azrob--

The buyer and seller in an open market create the value for a home and the appraiser is simply using comp data to support that 'meeting of the minds". (as long as it's within reason--generally assumed we all know that)

By simply "lowering" the price, you are in effect fueling the market with lower and lower comps. The buydown provides price support while providing a lower entry point for the buyer with reduced payments up front. 

And as a realtor--would you rather have 6% of a higher or lower price? (not saying that should be your only reason for looking at this as a means to help the market). This is just another tool to help buyer/sellers.

With regards to the appraisal: appraisers using comps that closed at higher prices in the last six months (generally assuming prices are lower now--right?) are having an easier time with valuations now vs a market where prices climb so fast they can't justify huge price increases.

This fixed rate product is no more a gimmick than having the seller pay closing costs. It is something that's been around for years though, but was largely forgotten when option ARM's became the rage. 

Wow… who is going to guarantee that the buyer’s income is going to increase at a level that is consistent with this plan?

Isn't this the same problem that is hitting the neg-am clients who were planning on increased income?

CR--

This is not a "one size fits all" product, but no loan really is. Would I recommend this for a person on a fixed income? No. (unless they qualified for the full payment year four). But a couple with one spouse entering the workforce in a few years?, or a buyer who's job has the potential for increases over the next few years? yes. Personally I think it's a very good option for first time buyers because many of them do start off low and have increases each year.

Does anyone have a guarantee on income rising? no. But I do believe that the economy will turn around and incomes will rise again within 3-4 years.

This is not the same issue with the neg-am type loan. Those loans had payments that nearly doubled after just a few years; many were sold to buyers as no-doc products because they couldn't qualify for anything--so they took the lowest payment and assumed they could refi back to the start rate if/when the payments increased. or "they could always sell the house if they got in trouble--everyonbe knows RE goes up 30% a year"...and for a while they were right. Unfortunately, many lenders did not fully disclose the WORST case scenario to buyers of neg-am, option ARM products. They glossed over this stuff. I remember people saying to me a few years ago: why would I want a 30 year fixed at 5.75% when I can get something at 1.5%? They drank the kool-aid.

I think what everyone is reacting to is that it sounds like what we are in the fallout of right now.  I agree that it is dangerous to assume your income will go up in the coming years.  People are losing their jobs and there is too much uncertainty to justify banking on future income.  THe program sounds like it could be good, but a little too risky right now.  The buying down points however is something that I think could be of great use as an incentive right now.

395--

The home still has to appraise...we're not talking about jacking up the price and "building in" the same amount as a concession.  What we're talking about is offering your seller an alternative to price reductions. Each price reduction has a negative effect on the valuation of the entire neighborhood, and becomes a perpetual spiral downward. Having the seller offer an alternative to reduction has the effect of stabilizing the values. The most popular seller concession is for closing costs, and/or points (points being a permanent buydown). I threw the 3-2-1 temporary buy down out there as another option to give buyers, sellers and realtors something else to consider when negotiating a contract.

"What we're talking about is offering your seller an alternative to price reductions. Each price reduction has a negative effect on the valuation of the entire neighborhood, and becomes a perpetual spiral downward. Having the seller offer an alternative to reduction has the effect of stabilizing the values."

No. What you are trying to do is artificially keep prices up. Foreclosures are driving prices down regardless of your creativity. Prices are dropping at the Shore, and will continue until they reach their Historic Levels.

BW--

1) Which historic levels are you referring to? 60's, 70's 80's ??

2) Of course, foreclosures put downward pressure on values, but a good appraiser will try to stay with open market purchases when giving a value. If it's known that one particular sale (out of 5 or 6 closings) in a neighborhood was due to mitigating circumstances ie divorce, death/estate sale, relocation. or foreclosure--that comp may be in the appraisers report with the circumstances mentioned--but they will give greater emphasis to the open market purchases. Those (MLS or FSBO) sales negotiations can take place on many levels: washer/dryer/sub zero/crystal chandaliers included, seller paid closing costs, seller paying points, builder funded- first years condo fees, take your pick. Doesn't any seller concession artificially prop up a price then? The purpose of this thread was to give realtors and sellers another bargaining chip. If you want to look at the program that really caused artificial inflation of values--the option ARM with NO MONEY DOWN. Let's give the $50,000 salaried buyer a $500,000 house with nothing out of pocket, and let him pay just a fraction of the interest due the first few years. It was the worlds biggest ponzi scheme and the last buyers in were the ones hardest hit.

It seems like the seller paying for points would be easier and offer a similar benefit.  Buyer saves money on interest and seller doesn't lose as much money as an outright price reduction.

NJ

2001 and 2002 was when the unsupported appreciation at the Shore started. The ARM and other junk loans were the majority of the problem, most were speculation. Yes, prices are dropping back to those levels, and has reached it in some houses already. The majority of the prices are still 51% over-valued and will sit until they join the Foreclosure ranks, or their listing expires.

BTW:There are also are some of the most unethical and unprofessional Agents I have ever seen at the Shore (Jim Sullivan is the exception). Luckily many are going back to their previous occupations.

Hey I'm sure the agents at the Jersey Shore will be glad to know they're the best at something. (Not sure if the NAR has a plaque yet for "most unethical and unprofessional" but thanks for the nomination!)

They already have that plaque on their wall from the 2008 Q1 numbers report. They reported wrong numbers and were caught by a watchdog group. The "unethical and unprofessional" starts at the top and permeates down in the NJAR. The Southern Shore areas are especially dirty.

NJAR Error

In PA I have had very good experiences buying houses with my Agent. I bought and sold several times using her, I wish she hadn't retired.

It is difficult to pass that on to the prospective buyers in a language that they all understand. Most people look at their front number! Athough it is a great idea!

I also read how confused the Realtors are by the concept.

They understandably prefer Standard Price Reductions because SIMPLE MATH is SIMPLE... Yet that may not be the BEST approach for their Sellers&Buyers.

I have been involved in the Real Estate and Mortgage industry since early 1985. I too was intrigued by the financial impact of a Seller-Funded Temporary Buydown as compared to a Standard Price Reduction.
The numbers don't lie!

Just recently we launched a new company at: www.321ADVANTAGE.com  ...where we do the math for you.

Please check out our site and let me know what you think.
THANKS!
Barbara Q.


Please Note: We are NOT Realtors or Lenders...think of us asFinancial Home Stagers! - We make homes more interesting, appealing and attractive FINANCIALLY!