We’re still in a housing downturn – here’s how to negotiate the best deal with developers

A 3 percentage point increase in mortgage rates last year, combined with home prices that jumped more than 40% during the pandemic housing boom, has devalued millions of homebuyers.

This sharp pullback in buyers comes at a far from ideal time for US homebuilders. You see, a combination of pandemic-related supply chain restrictions and an oversupply of eager buyers during the boom saw total units under construction hit historic levels last year. And that historic lag, along with skyrocketing cancellation rates, means buyers are finally getting some bargaining power with builders.

To find out how buyers can get a better deal with builders, Luck turned to John Downes, Certified Mortgage Consultant and Senior Vice President of Vellum Mortgage.

The first trick is to simply use crude negotiating tactics, such as offering low prices or using external lenders, “to keep the real estate lenders honest,” says Downes. The second trick is to see what kind of incentives builders can offer.

Unlike homeowners, who are less likely to give up their share, builders are simply losing profits. So when the market changes, developers can cut prices and/or remove incentives such as paying closing costs (which can be 2% to 5% of your mortgage), offering mortgage rate foreclosures (developers pay lenders a lump sum of money ). lower mortgage rates for potential buyers), paying homeowner association fees, or upgrading throughout the construction process.

“For builders, it’s a business,” Downes said. “Which is very different from the average homeowner who has this savings online. So for a builder, it’s just a rough business decision – am I still making money? And if I lose, what do I gain by losing?

Still getting builders to offer these incentives can vary by market, season, individual builders, and whether the buyer wants to purchase permanent inventory or ask to build a house.

And as for individual builders, they may have different views on inventory. For example, in the first few months of the year, someone may choose to hold onto a house until they get their desired price because there is time. Meanwhile, another builder may fear the future and offer aggressive incentives.

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There is also a clear difference between small builders and larger builders with more financial support, and this may affect the incentives they can offer. Therefore, it is important for the buyer to understand the market, the range and the developer with whom you are working, at least to begin with.

When it comes to improving or modernizing a home, builders sometimes use the fact that “they can build cheaper and the perceived value for [buyer] more,” Downes said. Luck. He gave an example: if a buyer is offered $50,000 to build a patio, and a builder can do it for $15,000, as a consumer he checks, and the builder basically uses “inflated values ​​to give the impression of more savings.”

Thus, such improvements associated with a physical home are not considered by lenders as concessions to the seller. Instead, lenders view anything that involves a cash exchange, such as covering closing costs or offering rate cuts, as a concession to the seller. But that doesn’t mean builders can’t still use these strategies to attract buyers—rather, the buyer just needs to qualify for these incentives, and this may depend on the type of loan.

However, incentives are not eternal – it usually depends on the market, which is cyclical. There are times when builders do not need to offer incentives (usually in a competitive market where there are multiple bids in excess of the asking price).

But Downs said Luck that, in his opinion, we are in the “sweet point of making deals”, at least for a few more months, until the market restores balance and becomes more in line with pre-pandemic norms. However, affordability is still an issue, Downes said, meaning that this sweet spot could potentially last a little longer.

“When I quote payments, people still choke when they hear them,” Downes said.

You can find relevant regional Zillow and Moody’s home price forecasts here.

This story was originally published on Fortune.com.

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