Interest Rate Buydown vs. Sales Price Reduction

[Dominique Guinnane]

Hello Everyone,

I'm a fairly new real estate agent in the Bay Area, CA. My brokerage recently had a quick presentation on how having an interest rate buydown vs. a sales price reduction could be beneficial to both sellers and buyers. I've been trying to go through the presentation to understand it a bit more but having not experienced it myself, I'd love to hear other people's opinions on this subject.

What are your thoughts? Have you tried this method?

I'd love to hear them, I'm trying to learn as much as I can!

Best,
Dominique

[Andrew Postell]

@Dominique Guinnane I think this should be addressed from the listing perspective and the buyer's perspective:

1. Listing Agent - If you are the listing agent, you don't get to see what the financing terms are for the buyer.  You might have a blanket statement on your purchase contract....but you are not seeing if the seller concessions is being used to buy down the rate permanently or if it's a temporary buy down (Like a 3-2-1 buydown).  From your perspective, it's just seller concessions.  And the buyer can use it towards anything really.  I have seen some listing agents market this feature...and that's good to do to generate interest...but you'll never know for sure what those seller concessions are used towards. Not really sure how the presentation you saw was "spinning" this as a benefit...I mean, I guess it is a benefit if they still sell their home...but make no mistake, this is real money that your seller is giving up in order to pay for a feature on the buyer side.  That's money out of their pocket and into someone else's pocket.  If the buyer doesn't need the concessions then maybe a reduction might be more appropriate but some of these details are to be worked out in the negotiation process.

2. Buyer's Agent - If you are the buyer's agent, generating interest in potential clients is really important right now.  And getting your potential buyer prequalified with a lender that offers these types of buy downs are critical, especially if that buyer is on the fence.  The 3-2-1 buydown that I mentioned above will keep the buyer's rate 3% below their qualifying rate the first year, 2% the 2nd year, and 1% the 3rd year.  So they will gradually be brought up to the qualifying rate.  And to be clear this type of a buydown DOES NOT solve any DTI issues. The buyer STILL MUST BE QUALIFIED AT THE HIGHEST RATE to get this loan.  Now a permanent buy down option (where they just pay points in a traditional manner) can solve some minor DTI issues.  Again, a lender must be able to speak to these options in order to guide the client and even measure out how to approach their needs and concerns appropriately.  And then if they can only qualify for X type of a loan (or will only buy with X type of a loan) then you, as the buyer's agent, now know how to negotiate with sellers.

*WHEW*  I know that was a lot but I hope that makes sense how I am describing it.  Feel free to post about anything else.  Thanks!