Monday, January 09, 2006

Ye Ol' Seller Subsidy`

You're reading through a real estate website, searching for houses that might meet your criteria. As you're reading the fine print (and I suggest heavily in reading the fine print), you start seeing the words, "Will help with closing costs," "$5,000 to buyer for closing," "Decorating allowance," "Seller to assist buyer up to 3 percent." These items are referred to as "seller subsidies."
If you're looking for a good deal -- seek out seller subsidies before you look for "Price Reduced." The seller subsidy interprets into real big dollars in the buyers pocket right up front. Even in the long haul, sometimes the $5,000 subsidy means more to the buyer than a $10,000 price reduction and it may be more beneficial to you as a buyer to go for larger subsidies instead of a price reduction. The ultimate win for a buyer would be to get both.
As you develop your strategy on your offer, remember that the best time to get a seller subsidy is in the fall and winter market. Though it means the buyer will be looking over less inventory than the spring, sellers may be softer in their terms and more willing to negotiate when only a few buyers are visiting the house than when they're marching through by the scores. In addition, the market is slowest in the fall and winter and sellers with their homes on the market are serious about moving forward.
(Just a note to sellers -- if you're staying in the same area, list in the fall and winter -- you'll have more serious buyers, and yes, you may have to negotiate downward, but then you'll save a lot on the purchase up.)
When you're looking for the "ripe" properties to work on subsidies and price reductions, look to the DOM -- days on market. The higher the number of days, the more chances you'll have to getting subsidies from the seller. The funny thing about days on market, it's the first indicator that a seller has overpriced the house. The challenge for the seller is that if the prices are dropping quickly, waiting even a few weeks to get the price in order could cost him thousands of dollars. So price it right up front.
Have your agent go over comparables from the neighborhood to determine your offer (sellers do the same thing). You want to make sure you're taking advantage of the speed of your market before making an offer. If other sellers are giving up $10,000 in the community, then you can easily take your offer elsewhere if the seller balks at handing over money to the buyer.
Keep in mind, there are very few rules to how much subsidy is allowed. Most times the limit is between 3 to 6 percent. This limitation is usually from the lender, who wants to see some money from the buyer put into the house. When a buyer places his or her own money into the house, they are less likely to default on the loan.
While this amount may not sound like a lot, just multiply it out -- 6 percent on a $400,000 property is $24,000. That's pretty big savings and can do a lot of redecorating.
Keep in mind how you word the cash that's being left at the table determines whether or not it is a seller subsidy. If, for instance, after the home inspection it's determined the house needs a new roof and the seller agrees to fix it, this is generally not called a "subsidy." The seller is just agreeing to bring the house up to par. However, if the buyer requests $10,000 for a decorating allowance and then spends it on the roof, they have just negotiated a subsidy from the seller. The wording and agreement in exchange of money is important.
The timing of the money spent also may determine if it's a seller subsidy or a seller's own expense. If the seller agrees to paint the interior and gets it done before settlement day, then that's not necessarily a seller subsidy -- the seller is painting his own house and then handing it over to the buyer for the agreed upon price.
If you find a pliable seller, during the home inspection you should note the fix-ups you want vs. the subsidies you want, because it could affect your financing if you wrongly label the cash being spent.

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