Savvy buyers expect incentives from builders
February 7, 2019
Savvy buyers are seeking out incentives from builders, especially on the West Coast and in other higher price point markets, according to representatives from John Burns Real Estate Consulting.
"Buyers have never had quicker and more complete access to information," stated consultant Dean Wehrli, one of a trio of consulting leaders with the Burns firm.
Joined by colleagues Lesley Deutch and Pete Reeb, Wehrli outlined four of the more effective incentives being deployed by today's builders. Speaking during a podcast, the presenters said the enticements are designed to generate traffic, save home seekers cash, provide buyers with nicer homes, and extend price discounts.
To generate traffic, builders are advertising more generous broker commissions and offering buydowns to lower mortgage rates.
An estimated 90 percent of builders of new home communities in California have increased broker commissions, according to researchers with Burns. They cited examples there and in Florida where such commissions have topped 6 percent.
About three-fourths of California builders are advertising lower mortgage rates, typically for the first few years, but sometimes for the life of the loan.
Buyers tend to be very receptive to having builders pay their portion of the closing costs for their newly purchased homes, thereby providing an immediate savings in cash. Speakers said such arrangements are especially appealing to buyers in lower price points and with high loan-to-value terms.
Builders are also offering discounts on home upgrades, particularly to purchasers at higher price points. "Since upgrades have a builder profit margin, a $20K allowance at the design center might only cost the builder $10K," said Wehrli.
Actual price discounts are still rare, especially in the Southeast, according to the Burns team. Notable exceptions have been at overpriced or poorly executed projects and in some very high-priced submarkets where a surge in new home competition occurred.
When prices are lowered, the Burns consultants indicated the discounts mostly come in three forms:
- Completed homes. "Value-oriented builders don't hold on to fully completed, unsold homes for long," Wehrli reported. "To drop prices without impacting the value of previously sold homes, builders will lower or eliminate any lot premium or not charge full value for the upgrades already included in the home," he explained. A gamble by builders who ramped up construction in 2018 in anticipation of strong sales and to keep their trades busy due to the labor shortage hasn't paid off, resulting in higher-than-planned inventory of completed unsold homes.
- Advertised price cuts. Buyers who encounter clearly marked discounts on price sheets displayed at one builder's sales office take these sheets to other builders and ask for similar cuts.
- Hidden incentives. Builders are offering last-minute price cuts when they sense it will persuade a wavering buyer to close. The Burns consultants said such incentives are more difficult to identify, but they've uncovered them by examining public records and via word-of-mouth by interviewing competitor builders who hear of them from buyers or other contacts. "Publicly traded builders are known to offer these incentives at month end, quarter end, and especially at year-end," Wehrli commented.
The Burns consultants expect incentives to continue "now that the incentive train is rolling," but reported they and their builder clients are not panicking. They believe a strong economy, rising wages, lower mortgage rates, high loan limits, a seasonal pickup in demand, and less speculative construction are likely to bring more near-term stability to the market.