Seller Concessions Secret to Reversing Rising Interest Rates?
Realtors and Lenders Work Together to Reverse Rising Interest Rates with This Creative Home Buyer Assistance Strategy.
- Rising Interest Rates Hurt Buyers and Sellers
- Seller Concessions as Buyer Assistance
- Understanding the Math
- The Right Time. The Right Market
- Working with Professionals
In this article, I’m going to show you how buyers and home sellers can save thousands of dollars by working with a professional loan officer and Realtor to successfully negotiate a WIN/WIN transaction using seller concessions.
Rising Interest Rates Hurt Buyers and Sellers
Today I did a quick search in the Multiple Listing Service (MLS) for homes for sale in Long Beach, California. The MLS is the service that Realtors use to list homes for sale to other agents looking at homes for home buyers that they represent.
Out of the top 25 homes listed for sale, 12 of them had significant price reductions. What does this mean? Well, it can mean a couple of different things.
When sellers reduce home prices, it can mean that they were simply asking too much for their home.
This is a common mistake home sellers make, and can be prevented when working with a professional Realtor that knows how to market the home properly for current market conditions.
A reduction in price often causes buyers to take a “wait and see” approach to making offers on a home.
“If the price was reduced once (or twice), maybe they will reduce it again?”
The most likely reason that nearly half of the homes for sale in Long Beach today are being reduced in price is the fact that interest rates are on the rise.
When interest rates rise, affordability goes down, which puts downward pressure on sales prices.
Home buyer Approved on August 31st, 2018
Let’s say you are a home buyer pre-approved for a maximum loan amount of $679,650, which is the FHA and Conventional loan limit for Los Angeles County in the State of California.
We are going to use an FHA loan as an example because it requires the lowest down payment, and the mortgage insurance premium is fixed.
Conventional financing interest rates and mortgage insurance premiums vary wildly depending on your qualifying credit score.
In this example, you have 5% available for a down payment, which reduces your mortgage insurance rate from .85% to .80% – that’s the lowest it gets for FHA.
- Max Purchase Price – $715,421
- Loan Amount – $691,651 (upfront mortgage insurance financed)
- Interest Rate – 4.50% (with $2,738 lender credit toward closing costs)
- *PI-MIP Payment – $4,066.17
(*Principal, interest, mortgage insurance included in payment – property taxes and insurance are not)
Home buyer Approved on October 15th, 2018
As we outlined above, you are at the absolute maximum you can be pre-approved for, and you’re out shopping for homes in the $715,421 price range or lower.
The problem is, interest rates have increased considerably in the last 6 weeks. Now, we need to revisit your maximum purchase price when you make an offer on your dream home today, October 15th, 2018 – only 45 days later….
- Max Purchase Price – $680,526
- Max Loan Amount – $657,813 (upfront mortgage insurance financed)
- Interest Rate – 5.00% (with $2,442.77 lender credit toward closing costs)
- PI-MIP Payment – $4,066.42
As a home buyer, you’re no longer able to qualify for homes anywhere close to $700,000, and you’ve probably been priced completely out of some neighborhoods you’ve been looking at.
As a home seller, you just lost a large number of potential home buyers, and the offers you are getting are probably much lower now that interest rates have gone up.
Seller Concessions as Buyer Assistance
Neither the buyer or the seller win when interest rate go up like we are seeing in 2018. In the above scenario, let’s say that you and your family have absolutely fallen in love with this home, and the seller really wants to sell this home to you.
It’s a perfect match between buyer and seller except that you’re now $34,895 away from qualifying for the loan, and the seller of the home is $34,895 away from being able to sell you the home.
They say that in a successful negotiation, everyone walks away thinking that they got the best deal. Let me show you how an experience loan officer and Realtor working together can make this scenario a WIN/WIN for everyone.
How Seller Concessions Work
Lenders allow the seller of a home to “credit” a portion of their proceeds to the home buyer. This is called a seller concession. Seller concessions can be used to pay a buyer’s closing costs only, and cannot be used to help with the down payment.
What experienced mortgage and real estate professionals know is that seller concessions can also be used to pay discount points.
What are discount points? Discount points allow a home buyer to make a pre-paid interest payment to permanently buy down the interest rate over the term of the loan.
Understanding The Math
The cost to buy down the interest rate from 5% to 4.5% in this scenario is 1.281% of the loan amount, $9,164.54.
For an apples to apples comparison, let’s also throw in the lender credit that we no longer have because we are paying discount points. For a total of $11,965 the seller has essentially given you a time machine back to August when you were able to qualify for a loan to purchase their home.
The Buyer Wins
You win big as a home buyer because you can now purchase your dream home at a price of $715,421 because you qualify for the mortgage payment at a 4.5% interest rate.
In the above scenario at a $715,421 purchase price, the amount of interest that the home buyer would pay at a 4.5% interest rate over the next 10 years is $282,783.37
With a 5.00% interest rate at the same purchase price of $715,421, the amount of interest that the home buyer would pay at a 5% interest rate over the next 10 years is $316,454.67.
Because of the Seller’s willingness to pay discount points, the buyer of this home just saved $33,671.30 in interest over the next 10 years.
Discount Points on a the purchase of a primary residence may also be tax deductible in the tax year following the year of the purchase of your home. Please consult your tax professional to see if this applies to you.
The Seller Wins
The seller wins because they can sell you their home for $715,421, and after paying $11,965 in seller concessions, they NET $703,456.
This is MUCH better than lowering the sales price to $680,526, and they saved $22,930 by helping you purchase this home!
Here is a snapshot of a home for sale in Long Beach right now. It’s been on the market for less than 60 days, and the seller just reduced the price $50,000.
Using seller concessions as buyer assistance would have saved this home seller over $30,000 dollars!
The Right Time. The Right Market
While this is a WIN/WIN strategy in any real estate market, today this is a particularly powerful tool for maximizing the benefit for all parties in the transaction.
When interest rates rise as quickly as they have in the past couple of months, a shock moves through the market that causes everyone to become confused, and sometimes make poor decisions based on limited information.
What’s a poor decision for a home buyer? Not buying because you think you cannot afford to.
Owning real estate is a short term decision about investing in your long term financial stability and the accumulation of personal wealth.
The ability to earn equity over time, and fix your housing expenses over a long period of time is a luxury that renters simply do not have.
Your landlord can raise your rent, or sell the home you’re renting at any time, without any warning. That’s a tough spot to be in when it happens to you.
What’s a poor decision for a home seller? Pricing your home wrong when you list it can scare buyers away.
Resorting to lowering the sales price until you get a good offer from the limited buyers in the market that are betting that you will not lower the price further.
Smart Realtors will help you price your home right, and advertise your home as an opportunity for buyers using Seller Paid Concessions as Buyer Assistance.
By advertising your home this way, you are striking back against higher interest rates, and attracting more buyers willing to pay you what your home is actually worth.
Working with Professionals
I can not emphasize enough the importance of hiring a professional, experienced Realtor and loan officer when selling or buying your home.
A homeowner that hires an inexperienced Realtor is not likely to even know that this opportunity exists. Missing this opportunity could cost you tens of thousands of dollars depending on the price of your home.
A Realtor that is simply listing the home for what you “think” it’s worth, resulting in a series of price reductions before it’s priced properly for the current temperature of your local market will cost you time and money.
Many Realtors representing you as a buyer do not necessarily have enough financing experience to negotiate this strategy with the Realtor representing the seller. And we don’t really expect them to. They sell real estate, not loans.
However, a Realtor that builds a team of experienced people around them, like home inspectors, contractors, and lenders, will have the resources at their disposal to truly represent your highest and best interest when buying, or selling your next home.
Your Options are Limited to the Experience of the Person You are Talking To
When you call a lender from a TV or radio commercial, or click an ad you saw on the internet that has a catchy headline, you are playing competence roulette, and the chances are better than not that you are being routed to a call center somewhere in Michigan (or even overseas!).
These tele-mortgagers hire customer service people to get you excited about borrowing money. These are not experienced or professional loan officers working in these high volume shops that only care about paying for the millions of dollars of advertising that they have to spend to trick people to call them.
As a loan officer with 20 years of experience, I work closely with Realtors on both sides of the deal, and can run through the numbers with them to come up with a negotiating strategy where all parties win.
If you are buying or selling in California, I can help. You may ask questions about your options below, or shoot me an email directly to email@example.com.
If you are outside of California, I can introduce you to a loan officer from our Expert Network that I personally know and trust that can work with your Realtor, and the seller’s Realtor to negotiate the best WIN/WIN scenario for all parties.
DISCLAIMER: I am an independent mortgage broker. This means that I have many lenders to choose from, and can match a buyer with the lender that is the best match for your loan amount, credit profile, and financing needs.
The numbers I’ve presented here are actual interest rates from one investor on October 15th, 2018. This investor is neither my best priced lender, nor my worst. They are right about in the middle.
These numbers may change from one lender to another, but the seller concession strategy will produce similar results for any home buyer and home seller in any market.
The single most important thing you can do is to work with a team of professionals that understand this strategy, and you can trust that they are going to look out for you the best interest of all parties.