Beware of Home Sellers
Offering Incentives

By Marshall Loeb
From MarketWatch

NEW YORK -- A home-buyer's market is a beautiful thing when you are eyeing the house of your dreams, your appetite whetted by this year's nationwide drop in home prices. Add to this a free incentive by the seller, such as a finished basement or a flat-screen TV, and you may be tempted to close the deal sooner than you should.

But remember: the gratis offer is little more than an excellent opportunity to start negotiating.

Homeowners and builders are throwing in all kinds of enticements to prospective buyers, from free round-trip plane tickets to a paid temporary lease on a car to a landscaping allowance. For buyers on the brink of surrender to that complimentary granite countertop, Money magazine offers a few rules to remember:

Make them show you the money. The incentive at the top of your list shouldn't be a short-lived luxury but a long-term comfort, which can certainly come from knowing you are getting the best possible price on the home you want. If you are thinking of getting a 30-year, 6.5% fixed-rate mortgage to finance your new home, do not settle for the new $2,500 big-screen TV that the owner is offering you free. Try instead to get the price of the house cut by that amount; that would reduce the price of a $200,000 house to $197,500 and in the long run save you $3,200 in interest payments. You could also pay less in property taxes, which are often based on a home's purchase price.


Go for the next best thing. If you can't get a lower price, consider asking the builder to cover the expenses you will incur buying the home: closing costs, homeowner association fees, even a few months' worth of mortgage payments. A developer who wants to record the highest possible price for that home may be unwilling to slash it but be open to entertaining other ideas.


Calculate the offer's true value. If the seller offers you a free upgrade, get a rough estimate of the cost of having it done yourself if you were to buy the house at a lower price. Also, ask yourself whether you would have opted for a particular incentive if you had to pay cold, hard cash for it. If it's not something you really care about then perhaps the fact it's free doesn't mean much to you.


Watch for the gotchas. A builder will often try to steer you to an affiliated mortgage lender, with a promise to give you a discount. But you can't count on the mortgage company to give you the best deal on rates and closing costs in the first place. If the mortgage offered is not the best one you can get (try to obtain at least three good-faith estimates from other lenders), subtract the extra cost of the seller's mortgage from the value of whatever incentive is being pushing, then decide again if the deal makes sense for you.


Know what's in it for the broker. Typically, sellers offer their brokers something beyond the customary 3% commission, which may naturally entice the latter to pressure you into a deal. To neutralize that bias, specify in your contract with the broker how much commission will be paid and ask that any extra money earned be applied toward paying your closing costs. You could also use an agent that represents only buyers (go to www.naeba.org). Exclusive buyer's agents typically pass additional incentives on to buyers in one form or another.


Keep the discussions friendly. Negotiating throw-ins can get complicated. If you expect the seller to toss in a favorite chandelier, you might jeopardize the entire deal. In dealing with individual sellers, you would be wiser to ignore incentives and focus on the price.

The bottom line: don't let negotiations distract you from your goal of getting the home you want with a financing policy that's fair to you.

 

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