Phil Caulfield's Blog
3,189 viewsHow To Buy The Home You Want Without Insulting The Seller
Written by Phil Caulfield, Mortgage Broker or Lender in 94010
April 1, 2009 4:32 PM Home Buying in Burlingame
3,141 views
Let's face it - most of us would like to buy more home than we can afford. We all want more room, a bigger back yard, and/or a pool, but we just can't seem to make the numbers work. We either can't come up with a larger down payment, or we just don't have enough income to qualify for a bigger loan. Most home buyers think the only way they can get the home they truly want is to make a low-ball offer, and hope the seller is desperate enough to accept. Unfortunately, this tactic usually insults the sellers and dismisses you in their minds as a serious buyer.
What if there was a way to stretch your dollars so that you could afford that bigger house without insulting the seller. Would that be something you would want to know about? Of course you would.
This strategy has been around for a long time, but few people understand it and how to utilize it. This strategy is called a seller paid buy-down.
Here is how it works. Suppose you see a house that you really like that is listed for sale for $800,000. You are going to make a 20% down payment. You want to offer $775,000.
Let's look at the numbers at $775,000. The down payment is $155,000. Let's assume a 30 year fixed rate, no point loan is at 5.625%. The payment would be $3569 per month, and the property taxes roughly $710 per month, for a total of $4279 per month.
You are worried that the seller is not going to accept this reduced price offer, and you certainly don't want to insult them, because you truly want the house. So you decide to use the seller paid buydown strategy.
Instead of offering $775,000, you make a full price offer of $800,000, and you ask the seller to credit $25,000 toward your closing costs.
What do you do with this $25,000 credit? You buy the interest rate down to 4.25% by paying almost 4 points, for example.
By buying the rate down to 4.25%, your monthly payment has been reduced to $3149 per month. The property taxes are slightly higher, $733 per month. The down payment is $5000 more. But look at the impact this strategy has - a monthly savings of $397 per month!
Now, here is the icing on the cake - although the seller made a contribution to buy your rate down, you get the tax deduction for the $25,000 in points paid all in the year that you purchase (check with your tax preparer to verify)!
This strategy is not only important financially, it is important psychologically to the seller. By presenting a full price offer you are telling the seller you are a serious buyer. The message you are sending is "I want your home, I just need help with the financing". This type of offer will be taken more seriously than a low-ball offer.
There are some technical details that are important to know with the seller paid buy-down strategy. Make sure you are working with both a real estate professional and mortgage professional who are familiar with this strategy and know how to implement it.<BR>
What if there was a way to stretch your dollars so that you could afford that bigger house without insulting the seller. Would that be something you would want to know about? Of course you would.
This strategy has been around for a long time, but few people understand it and how to utilize it. This strategy is called a seller paid buy-down.
Here is how it works. Suppose you see a house that you really like that is listed for sale for $800,000. You are going to make a 20% down payment. You want to offer $775,000.
Let's look at the numbers at $775,000. The down payment is $155,000. Let's assume a 30 year fixed rate, no point loan is at 5.625%. The payment would be $3569 per month, and the property taxes roughly $710 per month, for a total of $4279 per month.
You are worried that the seller is not going to accept this reduced price offer, and you certainly don't want to insult them, because you truly want the house. So you decide to use the seller paid buydown strategy.
Instead of offering $775,000, you make a full price offer of $800,000, and you ask the seller to credit $25,000 toward your closing costs.
What do you do with this $25,000 credit? You buy the interest rate down to 4.25% by paying almost 4 points, for example.
By buying the rate down to 4.25%, your monthly payment has been reduced to $3149 per month. The property taxes are slightly higher, $733 per month. The down payment is $5000 more. But look at the impact this strategy has - a monthly savings of $397 per month!
Now, here is the icing on the cake - although the seller made a contribution to buy your rate down, you get the tax deduction for the $25,000 in points paid all in the year that you purchase (check with your tax preparer to verify)!
This strategy is not only important financially, it is important psychologically to the seller. By presenting a full price offer you are telling the seller you are a serious buyer. The message you are sending is "I want your home, I just need help with the financing". This type of offer will be taken more seriously than a low-ball offer.
There are some technical details that are important to know with the seller paid buy-down strategy. Make sure you are working with both a real estate professional and mortgage professional who are familiar with this strategy and know how to implement it.<BR>
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Comments
Are you nuts, as I buyer I would be insulted by his high asking price and would have no qualms about offering $400,000 for a over priced $800,000 house and if the buyer didn't like it I'd wait three months until prices have dropped further and make a second offer of $300,000 because I'm insulted that this delusional seller did not except my first offer of $400,000
wait, i would wait for a few years for the price to fall by 25% or more
no wait, i would just rent. don't want fake pleasure from fake home ownership, while bank owns the home and i own the debt
I have so HAD IT with realtors trying to guilt buyers to "make an intelligent offer" so you "Don't insult the seller and they will know you are a serious buyer" Excuse me, but WHO ARE YOU TRYING TO FREAKING KID?!!
Today's buyer not only has 20 years of inventory to chose from, they are taking a big risk just by buying now anyway, if the economy and job situation worsens, which it likely will.
NO ONE should be worried about offending the da@#$ seller at this point, and you should make whatever low ball offer you want. This is a business transaction, not a charity donation!!
Like it or not, there are so few qualified buyers with cash that they RULE.
A great "no-spin" site that gives an awesome education on the Rent vs. Buy debate, and aggregates the best housing headlines from around the country each day.
Ed
Ed
Why is it better to buy when interest rates are sky high and houses are cheaper? I understand that the property tax will be lower, but I'd like a larger chunk of my monthly payment to be paying for my house and equity than for interest.
I'd appreciate if anyone can explain it in layman's terms to me.
Your risk is also lower because higher interest rates drive away speculators. Also, if interest rates drop in the future you will make money because your house will go up in value (house prices are inversely related to interest rates).
Realtors and the media don't want the people to know this very simple fact. Too low interest rates were the cause of this housing bubble, and now housing prices are crashing without interest rates going up. Just imagine the carnage if interest rates started going up!
3x gross income for a home should be the correct target price, especially considering our demographics (aging), unemployment (depression era numbers), and massive government debt (California).
Phil, you should stop writing about "insulting buyers" and focus more on realities faced by home debtors. All my friends who bought in the past 5 years are facing serious problems. These people are facing massive losses. The ones with young kids may not be able to pay for their college in the future. Their only mistake was believing Realtors and the media hype.
What about the $46,000 I'm going to spend on rent over the course of the next 3 years (if there's no inflation) while I wait for house prices to come down? That money's just gone and I have nothing to show for it. Alternatively, if I buy modestly now I could be a fifth of the way through paying my 15 year mortgage in 3 year's time (yes, at a purchase price of 3x our gross income).
I don't mean to sound clueless, and I'm not asking these questions to aggravate anyone. I honestly want to make a smart decision.
This one got me laughing, "By presenting a full price offer you are telling the seller you are a serious buyer." - maybe he should add that you'll be increasing my commision too! This is so funny houses were great
"investments" for years. Now they are not mere investments, they are so special that their prices don't
obey the laws of supply and demand. Get Real!
Dear flineo: Rent is not throwing money away anymore than paying property tax, insurance, interest and
upkeep on property that you "own". Most people don't own houses, they rent them from the mortgage holders.
Sounds like you need to seriously look into the true costs of "owning".
Hey guys read really good article http://www.housingnewslive.com/articles/reasons-housing-market-going-down.php
I'd simply see what that place would rent for . If the rent is $2500/mo you use that as your baseline to figure out what the house is really worth, at the interest rate so stated.
Annual rent divided by alternate mortgage interest rate = max price you should pay.
Since there is NO WAY in Hades the rent for that place would be $3569, let's use $2500 (and I am being generous with that I bet, too).
$2500x12 = $30,000 a year. Now, using his quoted interest rate (5.625%), we get this:
$30,000 / .05625 = $533,333
Crude but surprisingly accurate in most cases. Yes, mortgage debt-slaves have property taxes and HOA and maintenance but they also have the write-offs and those two usually cancel each other out.
The buy/pass formula gets even more strict if you buying the place as a rental property! In that case, you shouldn't pay more than the monthly rent you get is 1% of total purchase price.
1% of $800,000 is $8,000 -- that means if you buy that house for $800,000 then you have to charge (and collect) a monthly rent of $8,000/month to justify the investment.
Yeah, right. Good luck with trying to snag just $2,500/mo.
None of this will EVER be explained to you by realtors, folks. Instead, they will chose to insult YOUR intelligence by writing articles like this one.
A few quick comments: I too am tired of this "insult the seller" nonsense. And it's 100% nonsense. You make an offer and the seller accepts, rejects, or counters. At least YOU'RE making an offer. Let the seller be insulted by all the people who tromped through the home and didn't make an offer.
Second, in Phil's scenario the home is priced at $800,000. Someone is willing to put 20% down and is offering $775,000. That's 97% of the list price with 20% down. Far from being insulted, the seller should thank his lucky stars for a great offer. Insulted? Huh? Now, maybe if the offer was $600,000 with 10% down that'd be a different story. But 97% of the listing price with 20% down. In today's market? That's a fabulous offer.
Third, let's not assume the seller (and the seller's Realtor) are complete dopes. Hmmm. A full price $800,000 offer with a $25,000 credit to the buyer. I think the seller might realize his net would be $775,000. Same as an offer at $775,000 with no credit. Duh!
Fourth, we're assuming the home is actually worth $800,000. Maybe not in today's market. As someone above jokingly suggested, why not offer a cool $1 million, with $225,000 in a credit to the buyer? A few years ago, appraisers would have happily gone along with that, and mortgage brokers would have eagerly done the paperwork on that. But not so today. A lot of people are getting surprised when their homes don't appraise for the contract price.
I have to assume the original posting was a joke when Phil writes: "By presenting a full price offer you are telling the seller you are a serious buyer. The message you are sending is "I want your home, I just need help with the financing". This type of offer will be taken more seriously than a low-ball offer." Ninety-seven percent of the asking price isn't a low-ball offer. And someone who offers to put down 20% isn't conveying the message that he/she "needs help" with the financing.
My motivation for writing this article was to point out some financing alternatives that can benefit both a buyer and seller, and to explain the math behind it. I stand behind the math. You may have issue with my "insulting the seller" comments, but that was written to jazz up what would otherwise be an article about math - in other words, very boring.