Builder's Incentive Money

So what is "incentive money" when buying a new home? Not all builders offer it; sometimes you only see it offered on the last few homes in a builder's subdivision at close-out. Is it just "play money" provided to spend at the builder's design center, or a way to help out with out-of-pocket closing money in the form of "closing costs"? Why do so many builders balk when suggesting that they just take this money off the base price and thereby lower your monthly payment?

There are few reasons builders prefer, and sometimes insist, that they can't "deal" on the base price of their homes using incentive monies. The first reason is one that would please you if you had recently purchased another home like it in the neighborhood. That is, the appraised value for the various floor plans (including your own) in the neighborhood could become compromised, leaving an unhappy group of homeowners for the builder to deal with. This may only become an issue if current homeowners go to either re-finance or sell their homes, but can also incite bad feelings on the part of those who recently purchased and financed their homes based on higher prices. Although the lowering prices can become dictated by the economy, builders don't like to get the reputation of "dumping" their last few homes in a subdivision, or dealing too much on price for standing inventory. They would rather give monies to a buyer in the form of options and upgrades, or help with financing, such as closing costs, instead of lower sales price. Unlike an established neighborhood, where you may become surprised at the prospect of your neighbor selling his house for much less than you would because of a "distressed" sale situation, builders can try to hold firm on their pricing, because the neighborhood is brand-new. It is usually the builder who "creates" the value for an area of homes, and their ability to sell homes in the future may be dependent of how the buying public perceives their selling integrity in recently completed neighborhoods.

Another reason for builder hesitation to deal solely on price is the bottom line. A $6,000 package of incentives offered by the builder for upgrades in their own design center does not translate into the same amount of money to the builder's bottom line. Upgrades constitute a "soft" cost to the builder, as does builder-installed sidewalk, patios, etc. The builder's price of doing business with their sub-contractors leaves room for profit.

Comparing the builder's price for upgraded windows may result in your finding that the builder's price is slightly higher than similar windows from a fully retail operation, but the buyer has some distinct advantages for opting to use the money this way. Firstly, nothing is added to your mortgage amount unless you exceed the amount the builder is offering you in incentive money. And, having the builder install its own sub-contracted upgrades usually means that the builder must back up its product. If your new windows begin to show an excessive amount of condensation you will merely contact your builder's warranty department to send someone out to analyze the problem. The window contractor will, in most cases, will want to "fix" the problem, especially if it becomes a common problem for them, if it hopes to receive more contracted business from that builder.

Using incentive dollars towards financing may also be offered, either in the full sum or partial form. Using money this way is more of a "hard" cost to the builder, even if you are directed to use the builder's in-house or preferred lender. The money may "buy-down" an interest rate for you, pay all of your non-recurring closing costs, or have arranged for "special" financing, with a lower-than market fixed rate. If you are permitted to use the funds this way, it means real savings to you either in your monthly payments or initial move-in costs.

Buyers often ask whether the builder incentive money can be used towards their down payment. Sellers cannot, in any way, use the money towards the buyers' down payment, as it would be considered a "kick-back" and conflict of interest. Builders avoid using incentives in this way because of serious lending rules pertaining to a buyers down payment.

How can you help yourself feel better about the price of the home you are buying, and whether it is a fair value? Compare the base price of your, home to other new homes in the community by checking public record (county recorder's office or contact a title company or Realtor). If an analysis proves that the builder's sales price is not out of line, using builder incentive money in the ways they permit you to use them may be the deal you feel comfortable with after all.

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