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<\/a>Builders are offering more incentives to win buyers over. (Photo Credit: Atlantic Builders<\/em>)<\/p><\/div>\n 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\u2019s 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.<\/p>\n Typically, incentives are bundled into three main categories: financial, price reductions and structural\/design\/d\u00e9cor upgrades.<\/p>\n 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.<\/p>\n A snapshot of the market shows the prevalence of builder incentives growing as housing values fall and sales pace stagnates.<\/p>\n 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<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n \u201cWhen the market is undergoing some stress, you will see help with financing a home\u2019s 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,\u201d says Paul Emrath, vice president, surveys & housing policy research with the NAHB.<\/p>\n 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 \u201cenabling people to be able to get into the house at all,\u201d given the ongoing struggles with affordability. First-time homebuyers benefit from financial incentives to aid with affordability. (Photo Credit: Adobe Stock<\/em>)<\/p><\/div>\n The most common incentives being offered are designed to address that.<\/p>\n Buyers should \u201ctake advantage of all the opportunities and be aware that they’re more likely to find those kinds of incentives now,\u201d says Emrath, noting that price reduction should be the big- ticket negotiation item that buyers aim for.<\/p>\n 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.<\/p>\n Builders don\u2019t 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.<\/p>\n \u201cOur incentives are tailored specifically to the community and the demographic that we serve,\u201d says Chris Burns, vice president, sales with Atlantic Builders, noting that they have a number of communities across different regions and demographic profiles. \u201cBuyers are telling us what they need in order to make the house purchase work for them and satisfy their needs,\u201d says Burns.<\/p>\n In the past builder incentives might have been used as the proverbial carrot dangled in front of prospective buyers, but today they are \u201cmore of tool that is needed for buyers to get their deal done\u2026 It\u2019s not so much about incentives being attractive but because they are needed in order to make all the terms work,\u201d he says.<\/p>\n 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.<\/p>\n \u201cThe 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,\u201d says Burns.<\/p>\n 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.<\/p>\n Compare what incentives are out there and consider their value to you \u2013 both financially and in terms of your wish list.<\/p>\n 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.<\/p>\n 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? \u201cIf there is something you really like, you can get it thrown in,\u201d he says.<\/p>\n If there is something that interests you, such as a specific material upgrade or a financial incentive, there is no reason that you can\u2019t propose it to the builder. Now is the time to lay your requests on the table.<\/p>\n Lay your requests on the table and ask for specific items you want. (Photo Credit: Adobe Stock<\/em>).<\/p><\/div>\n Why are financial incentives so popular right now? Affordability.<\/p>\n 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.<\/p>\n 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.<\/p>\n Closing cost incentives \u201csatisfy 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,\u201d Burns says.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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\u2019s a tool that really helps with affordability.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n This may be beneficial to assist with costs you\u2019ll experience when you take over a new home, such as moving expenses or with furnishing your new home.<\/p>\n 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.<\/p>\n 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.<\/p>\n 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.<\/p>\n Realtor Susanna Haynie, broker\/owner with Co-Re Group, LLC <\/a>is seeing this first-hand with her clients. \u201cBuilders 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,\u201d she says.<\/p>\n Buyers should consider what design upgrades appeal to them the most and ask for them. Smart upgrades can add value<\/a> to your home- which is a bonus.<\/p>\n Haynie is also seeing builders offering appliances and enhancements like air conditioning at no extra cost.<\/p>\n While market conditions have shifted in favor of the buyer, the initial approach to the bargaining table remains consistent. It\u2019s 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.<\/p>\nA market overview<\/h2>\n
\nMost affected have been first-time homebuyers trying to save up for a down payment, who don\u2019t have equity to tap into in order to make their housing purchase more affordable or less leveraged with debt.<\/p>\n<\/a>Why are more builders offering incentives now?<\/h2>\n
How do you find out what incentives are available?<\/h2>\n
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\nIs being able to save a down payment?
\nIs your cash flow tight?
\nAre you a first-time homebuyer challenged by monthly costs?<\/li>\n<\/ul>\n
\n\u201cIf 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,\u201d says Emrath.<\/p>\n<\/a>What are the most common builder financial incentives?<\/h2>\n
Mortgage buydowns<\/h3>\n
Quick closing<\/h3>\n
Upgrade allowance<\/h3>\n
The art of the deal<\/h2>\n