Freebies from home builders

Builders are trying to lure reluctant buyers with plane tickets, new cars and even a pet peacock.

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By George Mannes, Money Magazine senior writer

The big giveaways
How desperate are builders to sell houses? Consider how many are now offering these incentives:
59% a price reduction
58% upgrades on appliances, floors
51% cash toward closing costs
Source:National Association of Home Builders
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(Money Magazine) -- In Seattle, a homeowner is offering round-trip airplane tickets to anywhere in the world, plus a six-night stay at a Four Seasons hotel to anyone who will just, please, buy the house he has on the market.

In New Jersey, a builder is trying to entice prospects to purchase condominiums and attached homes with a free two-year lease on a Mercedes-Benz. And in Michigan, a homeowner told potential buyers he'd throw in his peacock.

If you think these offers smack of desperation, well, you're right. With home prices nationwide expected to tumble nearly 6 percent this year and inventories of unsold houses at near record levels, sellers have good reason to feel a little frantic.

While individual homeowners can hunker down and wait until prices revive to sell, builders have to continue paying interest charges on unsold houses.

Small wonder then that builders are leading the way in trumpeting all sorts of discounts, specials and upgrades on kitchens, appliances and landscaping, with the occasional novelty item thrown in for good measure.

In a sea of "for sale" signs, advertising an incentive proclaims to a buyer: "Hey! Look at me!" And it often works: The something-for-nothing appeal of cars, TVs and trips can generate foot traffic and ultimately sales.

If you are a buyer, this fervent let's-make-a-deal hucksterism is a sign that you've got a lot more bargaining power than you had back in the take-it-or-leave-it seller's markets of recent years.

But just because you're offered a deal doesn't mean it's a good one. Some giveaways come with costly strings attached while others are hard to evaluate.

Most important perhaps, you have to be careful not to let your lust for a car or a granite countertop - or even a peacock - overcome your goal of getting the best possible price on the home you want to buy.

Rather than waste valuable bargaining power on such gewgaws, remember these rules.

Make 'em show you the money

The incentive that should be at the top of your list isn't a landscaping allowance or plane tickets or a flat-screen TV. What you should press for first is that timeless, ever-popular classic: a lower purchase price.

Almost any other incentive you opt for won't be worth as much to you in the long run - even if it seems to be of equal value.

Say you're thinking about buying a new home that you're planning to finance with a 30-year, 6.5 percent fixed-rate $200,000 mortgage. To clinch the deal, the builder says he'll throw in a brand-new, $2,500 big-screen TV. Nice. But wait - if you could instead get the builder to cut the price of the house by $2,500, you'd need to take out only a $197,500 mortgage.

Assuming the same terms, you'd end up shelling out $3,200 less in interest over the life of the loan than if you'd taken the TV. And you'd probably pay less in property taxes too, since they're often based on a home's most recent purchase price.

The moral: Money is almost always better than stuff. If you're offered an incentive, try first to get the seller to discount the purchase price by an equivalent amount.

Or go for the next best thing

Of course, a builder who's developing a whole subdivision or condo complex may be unwilling to offer you a straightforward discount. Put yourself in the builder's shoes: Dropping the price on a home in a new development not only infuriates the buyer who paid full price for a duplicate unit three months earlier but also automatically lowers the price for similar unsold homes in the same location.

A developer wants the recorded price of that home to be as high as possible, says Jon Boyd, president of the National Association of Exclusive Buyer Agents, "because he's got to sell another dozen just like that."

So if you can't get a lower price, ask for something that's almost as good - money to cover the expenses you'll incur buying the home. They include closing costs, homeowners or condo association fees, a few months of mortgage payments or points - upfront payments that will temporarily or permanently lower your mortgage interest rate. Such incentives can save you several thousand dollars - maybe enough to buy two flat-screen TVs.

Calculate the offer's true value

If stuff is all the builder is offering, you need to figure out what it's really worth to you - which is not necessarily what the seller says it's worth. Before opting for an upgrade, you should get a rough estimate of the cost of having it done yourself.

In some cases, you might find that you can buy and install a particular item for less than the builder would charge. But in other cases, the cost and hassle of ripping out the builder's handiwork and making changes after he's finished aren't worthwhile.

You've also got to ask yourself whether you really would have sprung for a particular incentive - say, a finished basement, hardwood floors or a hotel stay - if you had been forced to pay cold, hard cash for it. If it's not something you really care about, "then it's worthless," says Eve Alexander, owner of Buyers Broker of Florida in Orlando.

Watch for the gotchas

Though an incentive may look tempting, it often comes with a catch: The developer will require you to get your mortgage from an affiliated lender as a quid pro quo. (Under the federal Real Estate Settlement Procedures Act, a builder may not legally charge extra for a home if you don't use his mortgage company. But the law does allow him to give out discounts only to people who do use it. Go figure.)

You can't count on the builder's mortgage company to give you the best deal on rates and closing costs. To find out whether he is offering competitive terms, get at least three good-faith estimates from other lenders, recommends Benjamin Clark, owner of Homebuyer Representation in Salt Lake City.

Yes, those application fees will cost you, he acknowledges, but they'll be worth it. "Personally," says Clark, "I'd rather pay $200 and be sure that I'm not overpaying by tens of thousands of dollars."

If the mortgage offered by the affiliated lender is not the best one that you can get, you have a few options.

First, you can mentally subtract the extra cost of the seller's mortgage from the value of whatever incentive it is that you're getting, and decide again whether the deal makes sense for you. Or you can simply ask the seller to let you use your own lender.

"The first person you speak to will always say no," says Julie Tuggle, owner of Carolina Buyer's Agent in Charlotte, N.C. "You just keep going until you get a manager."

Know what's in it for the broker

There's another catch: To paraphrase Princess Diana, there may be a third person in the deal. Builders aren't offering incentives only to buyers but also to real estate brokers.

Typically, sellers promise them something beyond the customary 3 percent commission. Some payoffs are big - for example, an extra $10,000. Others aren't significant. Just for towing you into a development to take a look, a broker may earn a $100 steak-house gift certificate. All those goodies may entice a broker to press you to make a deal.

How can you neutralize your broker's possible bias? Specify in the contract that you sign with her exactly how much she'll receive in commission and what she'll be required to do with any oversize payments.

Perhaps you could both agree to apply any extra money she earns to paying your closing costs. Or you could use an agent who represents only buyers (for names in your area, go to naeba.org).

Exclusive buyer's agents typically pass these incentives along to the buyer in one form or another, says Boyd.

Keep the negotiations friendly

If the seller is an individual homeowner, understand that the transaction may be more emotional for him than it is for a builder. So don't be surprised if the home seller places an irrationally high value on an incentive that he throws in - say, the peacock that has taken up residence in the backyard or the baby blue dining room table that he built himself.

Maybe you'd just as soon pay him to take those extras with him, but play it straight. Just decline the offer politely and ask for a discount instead.

Negotiating such throw-ins can get complicated. If you expect the seller to throw in his beloved chandelier - maybe it's been in the family for a number of years - for nothing, you might jeopardize the entire deal.

In dealing with individual sellers, Benjamin Clark says, it's better to ignore incentives and focus on price. "The less complicated your offer," he says, "the more you tend to get the price down."

Get ready to walk

No matter how crafty a bargainer you are, there's a limit to the value of the incentives you can get without creating more complications for yourself.

Lenders, operating under guidelines set by mortgage buyers Fannie Mae and Freddie Mac, keep a close eye on how many extras a seller puts in the deal, and may pull back on the amount they'll lend you if the giveaways, in their judgment, get out of hand.

Generally, the more money you put down in cash, the more incentives you can get.

Finally, remember that the incentive is the tail, and the house is the dog, and you know which is supposed to wag what.

Don't let incentives draw you into a lousy deal. The freebies won't amount to the proverbial hill of beans if you're not happy with the house and the financing. So if either is not exactly what you want, keep shopping.

In this housing slump, after all, you can count on finding another, better deal just around the corner.  To top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.