How a builder can keep the sales price high in the public records?

Asked by Joe, Mboro Wed Aug 5, 2009

A builder has started construction of first 2-3 of the several same/similar houses he plans to build. He may be OK with a price(say $350k) that is much lower than the listing price(say $400k) but he won't do it to avoid future buyers using that price tag to negotiate and further drive the prices down. I have heard/read that in such a case builder includes free upgrades such as HDTV, finished basement or even a car; to keep the sales price high. I do not want free upgrades because i just don't have the additional money. Is it possible/legal to include following builder paid incentives in the sales price(which i will be paying anyway) :
- closing cost (~ $8000)
- first year property tax (~5000)
- first year asso fees (~5000)
- a brand new honda civic within 90 days or $13000 cash (since new civic costs $17k, he will pay cash)

what are the other (legal) ways to achieve objectives of both of us?

Thanks.

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Andrew Adams, , 01915
Wed Aug 5, 2009
BEST ANSWER
Read the Fannie Mae Announcement on IPC's
0 votes
Andrew Adams, , 01915
Thu Aug 6, 2009
"IPCs provide an incentive for a borrower to purchase a particular property, and in certain real estate markets, IPCs may be used to artificially inflate or maintain the sales price of a property. Fannie Mae has established definitive terms for what constitutes an IPC, specific limits on the use and permissible amounts of IPCs, and how IPCs in excess of permissible limits must be treated. These guidelines are designed to help avoid practices that may distort or artificially inflate the market value of properties."

The point of HVCC is to prevent home values to be artificially inflated...which is exactly what the builder is trying to do with these types of incentives.
0 votes
Kelli Cassidy, , 01950
Wed Aug 5, 2009
Hi Andrew,

Quick question , if/when this transaction does go to closing, what would be listed as sellers consessions?
0 votes
Joe, Home Buyer, Mboro
Wed Aug 5, 2009
Andrew,
Agreed, no real benefit to the buyer but if builder is very concerned about the "sales price in records" then buyer could just use it as a tool in negotiation and get the house at a right price. it's like window-dressing that is common on wall st.
mispresentation? depends, even the make-ups and wigs girls wear can be considered mis-presentation. sorry if this sounds like a blog/chat session.
Thanks for your time and insight.
0 votes
Andrew Adams, , 01915
Wed Aug 5, 2009
I don't see what is in it for the buyer and I do think that it will eventially be addressed. It seems to me that it is misrepresenting the value of the home.
0 votes
Joe, Home Buyer, Mboro
Wed Aug 5, 2009
Andrew, thanks for the fanniemae doc. It actually lists the incentives I was looking for. From the doc looks like IPC's are not illegal if disclosed to the lender. of course they should be reasonable. In our hypothetical example IPC's are less than 9% of value. The down payment goes from 37k to 64k which i guess is Ok(provided buyer has 64k to for d/p) because that 27k comes back to the buyer within a year as cash and savings on prop tax/asso fees.
I think if the builder does that routinely rather than exception then he could get in trouble.
0 votes
Andrew Adams, , 01915
Wed Aug 5, 2009
Joe on a $400,000 purchase price and the IPC's you propose the lender will view the sales price as $373,000. If you are putting 10% down your down payment on $400,000 would be $40,000. With the IPC's your downpayment would be $37,300 + the difference between $373,000 and $400,000 (27,000).

I just don't see a benefit to the buyer.
0 votes
Joe, Home Buyer, Mboro
Wed Aug 5, 2009
Hi Kelli, the "free car" is not a myth, builders in CA have given not a civic but brand new BMW's to buyers because in some cases they had agreements with past buyers about reimbursement if they sell similar houses for lower prices.
http://www.marketwatch.com/story/home-builders-dangle-incent…

But like andrew said, incetives affects the LTV ratio so lender may not lend enough forcing buyer to make higher down payment. I am OK with higher down payment as long as it is not illegal.
0 votes
Kelli Cassidy, , 01950
Wed Aug 5, 2009
I have never seen a car thrown in! I have seen sellers willing to pay condo fees and taxes, and builders throwing in new HD t.v.'s Is he willing to do this? I would contact a real estate atty. to verify. Before you do this, I would ask the builder if this is something he/she would be something they would consider.
0 votes
Andrew Adams, , 01915
Wed Aug 5, 2009
What you propose may not be legal.

The lender needs to be aware of the car and the first years association fees, and the first years taxes. Those would be considered interested Party Contributions and the loan amount and loan to value would need to be adjusted down based on the amounts of those contributions. If you do not disclose those items to the lender then it is illegal.
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