September is Marketing and Branding Month at Inman. Tips for better branding and in-depth features on how to take advantage of marketing tools provided by Zillow, Redfin and other platforms are all in the works in addition to insights from experts. You’ll find it all at Inman, as well as our two-day virtual, flagship event, Your Playbook for the Fall Market, in October.
At its Wednesday meeting, as expected, the Federal Reserve announced another interest rate hike of 75 basis points for the third consecutive quarter as part of its ongoing effort to curb inflation. The effect of these increases on the super-hot real estate market has been predictable, with homes sitting longer and buyers sitting on their hands, unwilling to commit to decades of what they see as outrageous mortgage payments.
It has been many years since most agents have had to worry much about interest rates. The last few years, of course, have seen record-low rates, but even the years prior saw comparatively manageable numbers for most buyers.
You’d have to go back to the bad old days of the mortgage crisis to find rates topping 6 percent, and back to the previous century to remember that our super-low mortgage rates are a historical anomaly. In fact, double-digit mortgage rates were the norm, not the exception, for many years.
Because of that, too many real estate agents may not be aware of or don’t fully understand the benefits of asking the seller to buy down the buyer’s interest rate with a closing cost credit. This simple strategy helps in so many ways.
- First, it helps the seller get their purchase price.
- Second, it allows the buyer to get to the payment they’re looking for by providing a long-term interest rate reduction versus the 2:1 ARM buydown that many lenders are talking about right now.
This is a win-win for sellers who are being lowballed right and left by suddenly confident buyers and allows them to get a higher net purchase price without the drastic reductions so many other sellers are having to deal with right now.
Wedgewood Homes interest rate buydowns
As one of the largest sellers of single-family homes in the nation, Wedgewood Homes met the Federal Reserve’s most recent interest rate hike with an immediate plan to help homebuyers. Wedgewood Homes, a real estate group that operates in 22 states and more than 800 cities across the United States, understands that affordability is one of the biggest obstacles homebuyers are facing in today’s market.
Their plan includes covering closing costs and reducing buyer payments with an interest rate buydown. This empowers agents to help their buyers have access to more options by improving affordability.
In addition, Wedgewood Homes partnered with preferred lenders across the country to split the interest rate buy-down costs. By improving homebuyer affordability, this created a true winning proposition for homebuyers, agents, lenders and Wedgewood Homes.
If you are an agent working with any kind of investor, it is important that you are knowledgeable about their latest offerings and if they provide buy-down options.
According to loanDepot consultant Chris Tosti, he is currently advising his clients to consider a rate buydown vs. a price reduction. For example, using a 3-point rate buydown vs. a $35,000 price reduction on a $650,000 sales price property, the buydown provides the buyer a savings of almost $400 per month in comparison to no buydown and a $175 monthly savings with the $35,000 price break.
The seller would have to reduce the price of the house by approximately $60,000 for the buyer to get the same monthly payment as buying the rate down 1 percent, which is a 3-point cost based on today’s rates.
“Monthly payment affordability is the buyer’s No. 1 concern right now that we are experiencing,” said Tosti, “but sellers are not in a position to lower their list price to a point that would save the buyer a significant amount of money from their monthly payment.” For this reason, Tosti is favoring seller-paid closing costs and seller-paid buydown, lowering monthly payments while allowing buyers to write more competitive offers and retaining as much seller profit as possible.
“We have been successfully using this strategy to partner with companies such as Wedgewood Homes, local and national builders as well as just your everyday seller [who] wants and needs to maximize their profits so that they can purchase their next home,” said Tosti.
Tosti says that they see the most success with this strategy when they are brought in early in the marketing process for the listing to help promote financing options. This is especially helpful if a buyer is asking for price reductions or seller-paid closing costs.
“The resistance that we have seen is that buyers don’t want to spend so much in points as they won’t necessarily be able to recover this point cost in the case that they want to refinance in the next two to three years,” said Tosti. “This is where the seller-paid buydown vs. the buyer paying points is a major difference. If the seller is paying for the buydown, it’s less of a concern of when there will be a “break-even point” of monthly payment vs. point cost.”
Individual agent buy-down negotiations
Two of our agents at Doora Properties, Jordan Farris and Elliot Lee, have been working with their trusted lenders to develop creative solutions for their homebuyers. One in particular was for a couple of first-time homebuyers purchasing a condominium.
The clients’ biggest concern was their monthly payment, especially during their first few years of ownership since they anticipated transferring into more lucrative jobs. They used a seller credit to buy down the interest rate, allowing them to feel more confident about their purchase.
“This will give our buyers a couple of years to find those new jobs, make more money, and feel confident about affording their monthly payments,” said Farris and Lee. By creating options, agents can allow buyers to move forward now while those who wait will eventually find themselves back on the hunt in multiple offer scenarios.
According to Chris Conlon, Regional Builder Manager with Caliber Home Loans, their organization has been tactical about using a negotiated seller credit to permanently buy down a borrower’s rate. Their strategies include the following:
- Where the comps have supported it, and the listing was priced competitively, the agents offered slightly over the list price, and asked for a seller credit to buy down the rate. With this strategy, Caliber was able to make the rate work and keep the comps in line with those in the neighborhood.
- In the second scenario, for a VA client, instead of a heavy seller price reduction, the agents negotiated a large seller credit to buy the interest rate down to a rate that was more prevalent in 2021 vs 2022. Caliber bought the rate down permanently vs. temporarily. This created a very manageable payment for the client and will help stave off the need for multiple refinances when rates improve.
Conlon said, “I always lean toward the permanent rate buydowns as this will give the borrower a true feeling of comfort with a fixed payment. I am not 100 percent opposed to temporary buydowns but use them sparingly and in unique situations.”
Business as usual is no longer good enough. As the market continues to shift in new ways, it’s essential for you to look for new strategies and new opportunities to get deals done.
If you are new to the industry, take the time to talk to those who have been around for a while and find out how to create winning openings to bring buyers and sellers together and get them on the same page. It’s good for them and good for your business.