Buydowns and Why Sellers Should Consider Them in Slow Markets, and Why Buyers Should Negotiate for Them

WHAT IS A BUYDOWN?
A buydown is when, during the sale of property, the seller credits the buyer an agreed-upon amount to help the buyer obtain financing at a reduced interest rate. The seller is thus effectively arranging to pay loan origination points for the buyer.

TEMPORARY vs LONG TERM BUYDOWNS
A temporary buydown buys the mortgage interest rate down for a period of one or two years. Typically it’s structured like this: the real note rate of the loan is, for instance, 6.5%. With a temporary buydown, the rate is reduced to 4.5% the first year, increasing to 5.5% the second, and adjusting to 6.5% at the start of the third year. This makes sense if you don’t think you will stay in the property long, or if you have some other expenses (college tuition, a second mortgage, race track losses (!), etc.) that you need to pay off within a couple of years.

A long-term buydown simply buys down the rate permanently. Typically, it’s an interest rate reduction of 1/2 to 1%. Doesn’t sound like much? How about this: a 1% rate reduction on an interest-only mortgage of $800,000 = $8,000/year = $667 lower monthly payment! If the subject property’s asking price is $1,000,000 (hence the $800,000 [or 80%] first mortgage amount), this could be accomplished with a $20,000 contribution (through escrow) from the seller INSTEAD of lowering the price $20,000.

DOWNSIDE TO SELLER
None, really, unless the market is solid or rising and properties are selling briskly at full asking price or better. If, however, the market is slow and you want to increase potential buyers’ interest in your property, it won’t cost you more than a price reduction, and it could cost you less, since the benefits to the buyer are so large.

UPSIDE
Huge!

For details and help with planning a buydown offer (whether you are on the selling or buying side) – please give me a call or shoot me an email.