It’s not so long ago that new homes were selling feverishly, as demand outpaced supply and a low interest rate environment encouraged homebuyers to pay what it cost, whatever it cost, to buy a home.

Builders were in the position to set terms and buyers readily accepted them. These days, with higher interest rates eroding affordability, the market has pulled back and has tilted towards a buyer’s market, upending that dynamic. With inventory already in the pipeline and the pace of sales slowing, builders are highly motivated to sell the homes that they have.

Incentives are a common part of builder marketing strategy, regardless of the market climate, but given the current conditions, builders across the nation are stepping up their game. With a myriad of builder incentives on the table for buyers, now is the time to negotiate your way into your dream home.

A bungalow with pleasant curb appeal

Builders are offering more incentives to win buyers over. (Photo Credit: Atlantic Builders)

Builder incentives are not a new phenomenon, although in decades past they were reminiscent of game show prizes, with vacations, cars and electronics up for grabs. Today’s incentives typically are more pragmatic, helping with affordability, enhancing livability and allowing homebuyers more choice and control over how their homes are designed and decorated.

Typically, incentives are bundled into three main categories: financial, price reductions and structural/design/décor upgrades.

And not all incentives are equal. You need to understand the relative value of what is being offered and how it affects your bottom line and how these incentives help you strike items off your housing wish list.

A market overview

A snapshot of the market shows the prevalence of builder incentives growing as housing values fall and sales pace stagnates.

Recent data from the National Association of Home Builders (NAHB) /Wells Fargo Housing Market Index indicates that a growing number of single-family home builders are lowering their housing prices and boosting incentive initiatives to sell their homes. In November 2022, 59 per cent of builders reported offering special incentives to close deal

Thirty six per cent of builders were lowering sale prices. This demonstrates a marked increase from the trend only a few months earlier in July 2022 when the market was still red-hot, when only 13% of builders reported decreasing housing prices.

The most common incentives offered by builders in the current market, according to the NAHB, are discounts on prices, offering to pay closing costs/fees, offering upgrades at no cost, mortgage rate buydowns and absorbing financing points for buyers.

These incentives are reflective of eroding affordability being a top concern for homebuyers, with higher interest rates reducing purchasing power, and a higher cost of living due to inflation. These incentives are meant to offer aid where the most buyers need the most help.

“When the market is undergoing some stress, you will see help with financing a home’s mortgage rates. And of course, we’re seeing the price discounts now. And we are seeing mortgage rate buydowns and help with paying, closing costs, fees or points,” says Paul Emrath, vice president, surveys & housing policy research with the NAHB.

Whereas the challenge characterizing the market during the Great Recession centered on the buyer pool struggling to sell existing homes in order to buy new ones, the issue today is more about “enabling people to be able to get into the house at all,” given the ongoing struggles with affordability.
Most affected have been first-time homebuyers trying to save up for a down payment, who don’t have equity to tap into in order to make their housing purchase more affordable or less leveraged with debt.

Young couple sits on floor counting money and taking notes

First-time homebuyers benefit from financial incentives to aid with affordability. (Photo Credit: Adobe Stock)

The most common incentives being offered are designed to address that.

Buyers should “take advantage of all the opportunities and be aware that they’re more likely to find those kinds of incentives now,” says Emrath, noting that price reduction should be the big- ticket negotiation item that buyers aim for.

Why are more builders offering incentives now?

With the economic headwinds blowing back on the housing market, cancellation rates are climbing and builders in many communities are faced with a backlog of homes to move. These trendlines not only provide the momentum to increase incentive campaigns, but also are shaping the type of incentives being offered. After all, an incentive is only effective if it meets consumer need.

Builders don’t randomly assign these incentives; they are designed and developed thoughtfully as a tool in their marketing toolbox so that they are relevant and desirable to their target markets.

“Our incentives are tailored specifically to the community and the demographic that we serve,” says Chris Burns, vice president, sales with Atlantic Builders, noting that they have a number of communities across different regions and demographic profiles. “Buyers are telling us what they need in order to make the house purchase work for them and satisfy their needs,” says Burns.

In the past builder incentives might have been used as the proverbial carrot dangled in front of prospective buyers, but today they are “more of tool that is needed for buyers to get their deal done… It’s not so much about incentives being attractive but because they are needed in order to make all the terms work,” he says.

Furthermore, while housing values are predicated essentially by what a buyer is willing to pay at a given point in time (influenced by a number of factors, such as supply, demand and the cost of borrowing), margins that builders need to achieve to maintain profitability remain fairly consistent. As values fall, and the cost of goods goes up, those margins get tighter. This creates urgency for the builder to move their stock, but also dictates what kind of incentives a builder will prioritize.

“The biggest incentives that you’re seeing are going to be the increased closing cost incentives. And that’s to help potential homeowners, maybe pay more points towards their mortgage rate, if they’re financing. That helps buy their rate down and tackle some of the affordability crunch,” says Burns.

How do you find out what incentives are available?

With builders in pursuit of buyers, many are advertising their incentives overtly, on websites and in social media. In the same way that you might research communities, model homes and price points with various builders on your house hunt, so should you search out what incentives are offered by prospective builders.

Compare what incentives are out there and consider their value to you – both financially and in terms of your wish list.

Determine what builder incentives will offer solutions to your challenges, making homeownership possible or offering more house with more upgrades for less money. Assess what barriers (or deal breakers) exist between you and buying a new home.

  • Is it the purchase price?
    Is being able to save a down payment?
    Is your cash flow tight?
    Are you a first-time homebuyer challenged by monthly costs?

Are you moving up the property ladder to your forever home, and want to sink your equity into creating a high-end home full of upgrades?
“If you’re having trouble with coming up with a down payment, helping with closing costs will help, as would a price reduction. If you are worried about your monthly payment, maybe the mortgage rate buydown would be helpful,” says Emrath.

“If there is something you really like, you can get it thrown in,” he says.

If there is something that interests you, such as a specific material upgrade or a financial incentive, there is no reason that you can’t propose it to the builder. Now is the time to lay your requests on the table.

Two people discussing terms and signing a contract

Lay your requests on the table and ask for specific items you want. (Photo Credit: Adobe Stock).

What are the most common builder financial incentives?

Why are financial incentives so popular right now? Affordability.

Price reductions would be the most obvious place to start in your negotiations and this is an incentive proposal that is gaining a great deal of momentum in the current market, but it is only one of a host of financial incentives that can reduce your costs overall.

For example, closing cost incentives are becoming common in new construction home deals. This kind of cash incentive affords the buyer some control in deciding where they might benefit most from an additional cash supplement.

Closing cost incentives “satisfy that pain point by making the home more affordable, while still providing a great value, and you’re still left with cash in hand that you would have put down for closing costs to give you more flexibility either to keep in savings as a rainy day or to buy new furniture or maybe buy the mortgage rate down even more and make payments more affordable. It gives the buyer a lot more flexibility,” Burns says.

Builders often work in partnership with their lenders of choice, and they will offer incentives (typically tied to a financial incentive of some kind) for buyers to work with those lenders, so it is worth investigating these options.

Mortgage buydowns

Another popular financial incentive is the mortgage buydown, which may be of particular interest to first-time homebuyers trying to juggle mortgage payments for the first time. The biggest benefit of a mortgage buydown is that it reduces your monthly payments. Buydowns are usually at a fixed-rate, which is beneficial when interest rates are climbing as well.

In a buydown, the buyer purchases interest rate discount points or pre-pays interest against their mortgage, and an incentive from the builder makes it easier to accomplish this. It’s a tool that really helps with affordability.

Typically, buydowns are structured so that your payments are lower in the first year of your term, increasing afterwards, depending on the buydown structure that you select.

Buyers are favoring the 2-1 mortgage at the moment, which sees lower payments in the first two years with the full interest rate coming into effect in year three. Also popular is the 3-2-1 buydown structure, which follows a similar pattern, with payments being lowest in the first year, rising in the following two years.

Quick closing

For builders with inventory to move, a quick closing is preferable, and they are often willing to offer incentives to buyers who are willing to purchase expeditiously. This may take a number of formats, but cash is usually involved.

This may be beneficial to assist with costs you’ll experience when you take over a new home, such as moving expenses or with furnishing your new home.

Upgrade allowance

Throwing in design and decor features for free has been a go-to for builders to entice buyers in various market cycles, but in current market conditions, these allowances are becoming more generous. This is because buyers value these upgrades, but also because these types of incentives are beneficial to the builders when it comes to negotiations, as the impact to their bottom line might be less.

For example, a track builder building a number of homes might benefit from economy of scale for building materials and labor at their disposal, so a material upgrade or elevated design feature may not gnaw as much at their bottom line as a straight price reduction.

Whereas in the past, it might have been standard to throw in a different elevation, or granite countertops, higher-end finishes and design choices that enhance the usability and comfort of home are offered more commonly, such as finished basements and bonus rooms.

Realtor Susanna Haynie, broker/owner with Co-Re Group, LLC is seeing this first-hand with her clients. “Builders are willing to work with buyers in terms of design features. They are allowing the buyer to actually select things beyond just maybe an exterior elevation so that they have more choice,” she says.

Buyers should consider what design upgrades appeal to them the most and ask for them. Smart upgrades can add value to your home- which is a bonus.

Haynie is also seeing builders offering appliances and enhancements like air conditioning at no extra cost.

The art of the deal

While market conditions have shifted in favor of the buyer, the initial approach to the bargaining table remains consistent. It’s all about getting your ducks in a row ahead of time. Establish your budget, prioritize your potential compromise list and keep your eye on your overall goal. This will help you to move quickly to secure a deal that will meet your terms, including your desired price and any incentives that you want.

Smiling woman shakes hands

Deciding on needs and wants before you start negotiating will help the deal move quickly. (Photo credit: Adobe Stock)

Many builders offer incentives and discounts specifically geared to military, veterans and public servants. If any of these apply, make sure to inquire.
Depending on the stage of development of the community that you are considering buying in, you may want to see if purchasing a model home is an option. These are typically offered at a lower price point than a brand-new build, or a spec build.

Before you prepare your initial offer, Haynie says, “You should have all the numbers laid out from the builder. And you should definitely ask ahead of time for as much as possible.”

She suggests that buyers continue to ask for what they want throughout the negotiation process, requesting for as much as possible in line with your terms, as it is a buyer’s market.

Establishing your framework ahead of time will not only help you to secure the best deal, it will help you feel satisfied with your negotiations.

“Start out with everything nailed down so you know what you’re getting or not getting, and that you’re okay with that,” says Haynie.

It’s also important to note that, if you are touring model homes and sales centers without your real estate agent (if you are working with one, or considering enlisting one), it is important to indicate this to the builder’s sales rep.

If you start to negotiate terms directly with the sales agent, you typically forfeit the option to engage your own realtor to negotiate on your behalf.

You are free to be represented by your own realtor or work directly with the builder agent, but if you are undecided, it is best to say that you are weighing your options. It’s not uncommon for buyers to be out touring model home and then decide to start discussing deals when the opportunity presents itself.

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