Trade in that old house
Home builders are finding creative ways to sell new houses in the middle of a slump.
NEW YORK (CNNMoney.com) -- In a bid to boost home sales, builders are looking to the auto lot for tips on how to move merchandise in a sagging market: they're taking trade-ins.
It's a rarely used business model in the U.S. that addresses concerns for both buyers and developers. For the buyer, a trade-in eliminates juggling a new home while waiting to unload the old one during a slump.
"It's a way to move the market," said Steve Melman, the Director of Economic Services for the National Association of Home Builders (NAHB). "It addresses one of the main reasons that would keep you from buying a house."
Few homeowners can afford to keep up two homes: they're on the hook for two sets of mortgage, maintenance, insurance and property tax payments. And now the market is getting more competitive. Inventories jumped 6.5 percent month-to-month in March, according to broker ZipRealty, which surveyed 18 major markets.
If individuals buckle under the burden of double home-ownership, the problem is compounded for new-home developers: the number of properties they're trying to sell rises. Trading in an old house for a new one begins to make sense for both parties.
"We've used it when markets get a little tight, and people have trouble selling their old homes," said Mick Pattinson, president of Barratt American, a Southern California-based home builder.
Pattinson said his parent company has been using trade-ins for years in the United Kingdom, where it is based, and Barratt American is currently offering to take trade-ins at a new development in Perris Valley, California. House prices there start in the upper $300,000.
Here's how Barratt's program works:
"Rule #1 is that the new home has to be a minimum of 20 percent more expensive than the old," said Pattinson. "We then do an appraisal, sometimes two, and see what we have to do to recondition the house for sale. Then we make an offer."
According to him, these offers tend to be quite fair, an average of 92 percent to 95 percent of the appraisal value. Considering the seller pays no commission, that could mean nearly the entire appraised value of the home.
"But if the builder has a big incentive to get rid of inventory, it can be even more," he said. In addition, Barratt is prepared to close within 30 days and the seller doesn't have to market the home through a real estate broker, saving the 6 percent or so commission cost.
"It's a simple program," said Pattinson. "People are surprised when they learn about it. And doing a trade-in gives them a great deal of certainty as to what the final price will be."
The high trade-in value makes it pretty close to break-even for the buyer. And, according to Melman, many of the developers combine the trade-ins with other incentives or discounts.
With their construction expertise, builders can quickly remodel the old home for a reasonable cost and sell it for more than it would have fetched in its old condition. Many builders also have a sales staff to market the home, so they don't have to worry about third-party broker commissions.
According to the latest NAHB survey, about 10 percent of builders nationwide use some form of trading program. About a quarter of them said trade-ins were either somewhat or very effective, compared with 19 percent who said they were ineffective.
The steps appear to be working for builders and homeowners. New home sales soared in April, up 16.2 percent compared with March. But the incentives took some of the profit out of the deals: The median price of homes sold fell 10.9 percent from April, 2006 to $229,100 and was down 11.1 percent from March.
The use of trade-ins only began to heat up last summer, according to Melman, when more markets fell into a swoon.
"Up until then, people could sell their houses pretty easily," he said.