Significant market changes usually bring changes in the industry and what we are going through now is no exception. When the 2008-09 market crash hit us, we learned about something called short sales. Nobody we knew had ever heard of them and very quickly it became 60-70 percent of the market. They were everywhere, very time consuming, and took a long time for lenders, escrow officers, and agents to figure out. Buyers and sellers were spun for a while because nobody knew what to do. This time is not like that time. We are seeing some adjustments to try to make things work in this market. One such item is the loan rate buy-down. Some sellers are offering it as a matter of fact already, primarily builders with inventory. Buyers looking to buy in this market are testing the waters with sellers to see if they will help them obtain a better loan rate by paying their rate down. It isn’t automatic as some sellers aren’t as motivated as a buyer hopes they are, and they don’t come to terms. Loan rate buy-down is where the borrower pays a point, or several, to get a lower interest rate. Each point represents 1 percent of the loan amount. A $300,000 loan for example would cost $12,000 to have a 4 point buy down. If the buyer wants the seller to pay it a couple of things can happen. The seller can treat it as a discounted price, or they can increase the price to offset some or all of it. If the price gets increased, be aware that the property must appraise. We are in a declining market, but appraisers go back six months so at this time the comps are still there to get an appraisal to cover the point adjusted price. If you are involved in such a transaction, you will see another difference in that the interest rate in the contract will be higher than what they are seeking. This is common as the rate in the contract is a ceiling rate, not the actual rate the borrower will receive. With a rate buy-down the rate will be set in the lender’s prequalification letter. We received one recently where the borrower was getting 1.5 percent below the amount stated in the contract but there was an additional comment at the bottom of the letter stating that it was conditioned on the borrower receiving a 4 percent credit from the seller. In other words, the borrower was only getting the rate that they purportedly qualify at, if the seller buys down the rate. This is kind of like the days of short sales where sellers gave buyers credits so be sure to read the details as you work through the paperwork. As we go forward, there will be other adaptations to the changing market. Ask your agent about consequences of things so you understand what is happening now versus what you may be familiar with from past experiences. The end result is what counts, not the way that you get there, but don’t walk into a trap of unintended consequences. You should be just fine, but we want you to be aware at all times during the process. Don’t get hung up on the principle of things, i.e. – “I’m not paying for their loan!” If it is to your advantage to contribute something to help them buy down their rate to make it more affordable and you can help yourself achieve a sale along the way, go for it and close the sale. If it isn’t in your best interest, say no, or counter them as you would any other item that you aren’t comfortable agreeing to. Remember, however, taking $5,000 off the price, or crediting them $5,000 toward their loan rate buy-down nets you the same, but buying their rate down has a major consequence on the buyers’ ability to buy. It generally comes down to time and money. When will it happen, how fast, and what is the cost or net result? The process can change over time, but when it’s all said and done, it’s the time and money factors that count so keep your eye on those “balls” during your buying and selling process. When it comes to choosing professionals to assist you with your Real Estate needs… Experience is Priceless! Jim Valentine, RE/MAX Realty Affiliates, BS.3481, 775-781-3704. dpwtigers@hotmail.com
