A SELLER CREDIT IS A BETTER OPTION THAN A LOW OFFER

As housing inventory and interest rates increase, it is time to dust off an age-old tool: seller credits. While seller credits have typically been used to assist first-time homebuyers, they are equally effective in the higher price ranges.

I live and work in the East Bay area of Northern California where a "starter" home can easily cost $500,000 and a 3 Bdrm, 2 bath home in a good school district is $750,000 or more, therefore it is a good market to demonstrate the benefits of a seller credit versus a low offer at any price range. The best way to make my point is to give you two examples of benefits resulting from seller credits: monthly payment savings and increased purchasing power.

Monthly Payment Savings

Mr. Move-Up has decided to purchase a home listed at a sales price of $750,000. He is approved for a 30 year fixed rate, interest-only mortgage at 7% with a 20% downpayment. If he purchased at the list price, his monthly payment with a $600,000 mortgage would be:

Interest-Only mortgage: $3,500.00
Homeowner's insurance: $ 93.75
Property taxes: $ 781.25
Total monthly payment: $4,375.00

Even though the home is already competitively priced, Mr. Move-Up knows it's a buyers market and would prefer a lower monthly payment so he makes an offer at $730,000. His monthly payment with a $584,000 mortgage would be:

Interest-Only mortgage: $3,406.67
Homeowner's insurance: $ 91.25
Property taxes: $ 760.42
Total monthly payment: $4,258.33

A monthly savings of $116.67

Now this is where it gets really interesting!

Compare the results if Mr. Move-Up restructured his offer back to the original List Price of $750,000 and asked for a $20,000 seller credit to lower his interest rate. His interest rate would lower from 7% to 6.25% and his monthly payment with a $600,000 mortgage would be:

Interest-Only mortgage: $3,125.00
Homeowner's insurance: $ 93.75
Property taxes: $ 781.25
Total monthly payment: $4,000.00

A monthly savings of $375.00

Mr. Buyer receives more than 3x the monthly savings at the same cost to the seller. In order to get the equivalent payment savings without a seller credit, Mr. Buyer would have to offer $685,750.

I know there are some analytical readers who are thinking, "Nice idea but the downpayment at the $750,000 sales price is $4,000 higher so the comparison isn't accurate." If I add a $4,000 fixed second mortgage at 9% - and amortize the payment to really make the point - the additional cost per month would be $32.18. Mr. Buyer's monthly payment savings would still be $342.82 per month.

Increased Purchasing Power

Ms. First Time Homebuyer qualifies to purchase a $400k condo using an 80% interest-only first mortgage at 7% and a 20% interest-only second mortgage at 9%. She qualifies for the purchase at a monthly payment of:

Interest-Only 1^st mortgage: $1,866.67
Interest-Only 2^nd mortgage: $ 600.00
Monthly HOA fee: $ 300.00
Property taxes: $ 416.67
Total monthly payment: $3,183.34

Ms. First Time Homebuyer hates every condo available in her price range but has fallen in love with a $440,000 condo. You could write a $40k low offer but if the home is competitively priced, the seller may balk at the 10% reduction. Is there a better way to accomplish your buyer's goals? Yes! Write the offer at the list price of $440,000 with a $17,100 seller credit. The credit will lower the buyer's first mortgage interest rate to 6.25% and the second mortgage interest rate to 8.125%. Even with the increased property taxes, the buyer's payment is within $4.15 of her payment at $400k:

Interest-Only 1^st mortgage: $1,833.33
Interest-Only 2^nd mortgage: $ 595.83
Monthly HOA fee: $ 300.00
Property taxes: $ 458.33
Total monthly payment: $3,187.49

Isn't a $17,100 credit much easier to negotiate than a $40,000 low offer?

The bottom line.........before you write a low offer on a competitively priced home, call your preferred lender and heat up the calculator!

An important note about seller credits: This is not an effective strategy to sell an over-priced listing for an unrealistic seller. Lenders will review the appraisal to ensure that the sales price has valid fair-market comparables.