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The Irresistible Offer

Here is the short version for the sellers that only want the high points.  Comparable sales in our market do not define seller contributions towards the buyer’s closing cost and/or pre-paid items.  By pre-arranging financing the home becomes much more affordable and will attract more prospects.  There are no upfront costs involved to use The Irresistible Offer, the funds are deducted at closing from the proceeds and if the house does not sell it did not cost a penny.  Work with your loan officer to select the best combination for the most likely buyer.  And then allow the borrower to choose how to allocate the funds.  There are unlimited combinations depending on the price range and location of the home.  Interest rate buy downs have thousands of combinations, not to mention grants, types of loans, amortization periods and so on…

Now for the detailed version:

Buyers will automatically default to the worse case scenario unless presented with a better option (offer).  Lowering the sale price will only lower the payment by a few dollars per thousand dollar reduction.  Knocking off $1,000 on the sale price will only improve the payment $5 to $7 per month.  Neither party wins.   

I have closed more than a thousand loans that began with The Irresistible Offer. You know I am a mortgage guy so you know the offer is going to be about money and that is the one thing you control more than the other two items that influence buyers. I’ll give you many details about how to structure The Irresistible Offer, but first let’s see why it is necessary to create one in the first place.

Buyers who are going to live in the home they intend to purchase have a certain set of criteria in mind, even if some of that list is out of their awareness. The possible features that could be on the list are endless, truly endless; however, the list can be divided into three main categories:

• Location
• Physical amenities or quality and quantity
• Affordability

After you have about a million conversations with homebuyers it will become vividly apparent these three categories are all weighed against each other during the buying process. Keep in mind we are talking about a typical buyer that will make a down payment and borrow the rest of the purchase price. It is possible you could find a cash buyer, but not probable. The reason you are here is because you want to sell your home, so we are focusing on the highest segment of prospects. In other words we are not betting on long shots.

Every buyer is unique, but the process of selection is not. Most buyers do not actually write down a list, but somewhere in the back of their mind it exists. Usually it is very vague and fuzzy in the beginning, but firms up over time as they look at homes. The longer they shop for a home the more defined the three categories will become. 

If this is true, why do they buy a particular house? What is the one thing that makes them pull the trigger and write an offer?

Something in one of the categories that drive their desire leaps forward and becomes irresistible. This can happen on the very first house a buyer looks at, and when it happens it is usually the last house the buyer looks at.

All three of the driving forces behind a purchase are intertwined but as I mentioned none of them are carved in stone, usually. The same buyer could shift from one target home to another should something in one of the categories leap forward. An example of this would be a very similar home on the same street suddenly comes on the market at a substantially lesser price.

Let’s stay with the example of two homes on the same street but this time they are priced exactly the same. Your rival neighbors spend a great deal of time and perhaps some money to fix up their home and compared to yours theirs looks brand new. Chances are they will win. Both of you are competing for the same prospects. The buyer is going to become excited enough to leap when something in one of the three categories stands out in their mind. If this doesn’t happen they continue to look at other properties.

In every transaction that I have been a part of, buyers consider the three things already mentioned, location, quality/quantity and affordability. And they shop for a home until something in one of those categories stands out far above the other homes they have seen. Which one is most important? That depends on who you ask; I am a mortgage guy so I will say affordability. This is a good answer simply because a seller can not afford to change the other two.

Many years ago one of my first clients was a factory rep for a major automobile manufacturer. I asked him what one thing sold cars. His answer changed my career. He told me he was ashamed to admit it but that his company (a giant in the industry) spent more money trying to answer that one question than they did on any other research, including safety, quality, etc. And they always came up with the same answer, affordability. No matter how much the prospect loves the car if they can’t afford the payment, it’s not leaving the lot.

The same is true for your home, no matter how much the prospect loves your home they can not buy it if they can not afford the payment. At this point you may be saying to yourself, “Duh!”

Exactly, it is a simple concept, yet sellers never and I mean never consider it when marketing a home even when they work with an experienced Realtor®. Why? Because there is an industry misconception that financing is solely the buyer’s responsibility. Can you name a major department store that doesn’t offer a charge account? If providing financing helps sell a pair of jeans, how much more important is it for something as expensive as a home?

I assume you are listing your home at market value. If that is correct, why do you think buyers offer less than the listing price? The most common answer is they can not afford to pay the price. They pre-qualified for a loan and the loan officer told them they could not afford more than $xxx. They want the best home they can get for the money, so they look at homes that are priced a little above their limit. This is the main reason they must offer less!! And it applies regardless if it is a buyer’s market or seller’s market; it is simply how buyers shop.

Sellers always focus on price, not terms. The price does not dictate the terms of the financing. That is controlled by the buyer, the seller or both. If you leave this up to the buyer they will always default to a method that opposes what you are trying to accomplish as a seller. Without realizing it they will ask the lender for the most expensive interest rate, I know because they ask me for that every time. “What is your lowest rate today on a 30 year fixed rate with no points?” They asked for the lowest rate, but then they defined the loan product. Guess which rate is the highest on the rate sheet. This is true for all lenders; the 30 year fixed rate with no points is the highest published rate.

Why do you care what the buyer does on the financing? Because it has a direct impact on how much their payment will be, therefore how much they can afford to pay for your home. Unless you offer something different the prospect will always default to the highest rate. Why, because the idea has been handed down in their family since the great depression. Prior to that most mortgages were made for a one year term and renewing them was difficult. It is what they have been told is the right way to finance a home.

Do not worry; your home will sell with or without The Irresistible Offer. It is simply a matter of time. On this page we are going to discuss time and money. The strongest argument for using The Irresistible Offer is simple; it can shorten the timeline and increase the net proceeds for the seller.

You can either negotiate with buyers on price or terms. If you list at market value and draw a hard line on price it will lengthen the time line. The goal is to net as much as possible and do so within a reasonable period of time.

Your Realtor® will have access to some very important numbers. He or she will be able to see how many days homes in a certain price range stay on the market. Another important figure is called a concession. It is basically a percentage figure that represents the difference between list price and sale price. If the list price is $200,000 and the sale price is $180,000 then the concession was 10%.

The true concession factor is always higher than the published one for a couple of reasons. In our market area the ratio is based on the current list price not the original list price. That means if a home was originally listed for a figure, did not sell and the listing expired, and then put back on the market as a new listing with a lower price, the concession will be calculated using the lower price not the original price. Therefore, all of the sellers that listed did not sell and later adjusted down mess up the calculations.

It is important we acknowledge that by far most transactions contain some type of concession from the seller, just giving you the facts. There are many ways the concessions can take place, a lower sale price (which is the published one), paying closing costs for the buyer, leaving behind appliances that were not included in the listing, etc. I remember a transaction long ago where the buyers fell in love with the sellers’ dog while looking at the home, wrote it in the contract the dog went with the house! The sellers cried at the closing!!! Trust me, I have seen it all.

The point is if you want to net as much as possible and the list price is in line with competition, your property better stand way out in one of the other categories other than price. If that is not the case, you need to create The Irresistible Offer.

If your home is priced at market value the buyer will usually offer less than listed price for the reason we discussed earlier. Typically the higher the price of the home the larger the difference becomes.

Over the years I have noticed the gap between list price and actual sale price shrinks as the price range decreases. In past years the lower price ranges have reported near zero percentages, with some instances of selling above the list price! How do you explain that? Simple, in bygone years there were seller funded down payment assistance programs that allowed buyers in need to get a down payment from the seller. Those days are gone, but it proves my point. A buyer will pay more for a home if the seller helps out when it comes to financing.

I am going to use an example of a home that is listed for $200,000. Left to structure their own financing the buyer will offer less than the listed price, 5% less would be $10,000 and 10% would equal $20,000. If the sellers draw a hard line in the sand and say, “We will not take less than $195,000” they may get it, or more likely the time line will stretch out and the house will be on the market longer.

Just to make the figures easier to follow I am going to pretend the sale price and loan amount are the same figure. The amount the buyer can borrow depends on the type of loan they use, FHA is one number, conventional another and VA yet another amount. Let’s go with VA because the buyer can borrow 100% of the purchase price.

As I write this the interest rate on a 30 year VA loan with no points is 4.75%.

$200,000 @ 4.75% over 30 years = $1,043.29

If the buyer offers $10,000 less than the list price and the interest rate stayed at 4.75% it would have looked like this:

$190,000 @ 4.75% over 30 years = $991.13

That’s weird! The seller is out $10,000 and the buyer only achieved $52.16 less in payment. That is only $5.21 per thousand dollars reduction.  Neither party really wins. This is what happens when both parties focus on price instead of terms.

The seller could offer to permanently buy down the interest rate (pay points) to 4.375%.

$200,000 @ 4.% over 30 years = $954.83!!!

It takes 3 points to achieve the lower interest rate based on today’s rate sheet, and the spread (yield) changes almost every day. This maneuver is called a permanent buy down and one point is equal to 1% of the loan amount, one point does not equal a 1% reduction in rate. On a loan amount of $200,000 the points in this example would be $6,000, the seller’s position improved 40%.

The points are not payable until the closing, all we are doing in creating an example to use as a sales tool.

Before actually looking at homes the buyer pre-qualified for financing and thought the payment range on a home priced at $200,000 was going to be somewhere between $991 and $1043. We tossed out a number $37 better than the buyer’s best hope expectation. Is this irresistible? Not really. It is good, but it does not cause the buyer to gasp for air.

Back to the same example, sale price and loan of $200,000, this time the seller prearranges the terms to be a permanent buy down first then a temporary buy down on top of that. A temporary buy down is just what it sounds like; it buys down the rate temporarily, for a year or two. The longer the period the more it costs.

This time we have two steps:

First is permanent buy down $200,000 @ 4.5% for 30 years = $1,013.37
Then we do a temporary buy down for a year to 3.5% and the payment for the first year is $898.09!!!

Now THAT is almost an Irresistible Offer!!!

Both payments are lower than the buyer’s expectation. Both sides win, the seller in this example paid $5,000 which is much less than lowering the price 5% or $10,000. And the benefit to the buyer is obvious.

Okay let’s try on one more example, the permanent rate is going to be 4.25% only this time we buy it down temporarily for 2 years, 2% off the first year and 1% off the second year, and so our payment for the first year looks like:

$200,000 @ 2.25% = $764.49

Now THAT REALLY is an Irresistible Offer!!!

Zero points and no concession had the payment at $1,043 a month verses our example at full price with a payment of $764 per month for the first year. Which payment do you think will excite buyers the most?

But that is only for the first year you cry! True, and the second year payment is $870, years 3 through 30 are $984 and isn’t that payment still less than what it would have been on $190,000 @ 4.75% ($991)? Well, yes it is!

Seriously, prearranging a financing example costs nothing unless someone takes you up on the offer in which case it was successful. Negotiating on price is much more stressful and chances are you will net a great deal less.

What is The Irresistible Offer for your home? It depends on several things, price, location and property type just to mention a few. A four bedroom single family on an oversized lot priced at $300,000 would be entirely different than a two bedroom condo priced at $120,000.

More importantly it is imperative to anticipate the profile of the most likely buyer.

The Irresistible Offer must be tailored to the property and the buyer.

The goal is to get a buyer excited about buying your home. Pre-arranging the financing will accomplish this.

How much should a seller commit to spending on The Irresistible Offer? 3% of the purchase price.

Why that amount? Four strong reasons:

• Because it is the maximum amount allowed on some types of loans.
• It is enough to have a dramatic impact on the payment.
• It is significantly less than the buyer would try to achieve negotiating on price.
• Anything less and we simply teach the buyer how to structure financing. The goal is to have them buy YOUR home, not use this financing technique to buy some other property.

In today’s market place a 3% contribution will net the seller more than a %5 or 10% reduction in sale price.  Match this up with The Golden Rule and all of the T’s are crossed and the I’s are dotted.

The general Annual Percentage Rate (APR) for the examples on this page range from 4.81% to 5.267%. Assuming a 30 year fixed rate loan, combined with optional temporary rate buy downs.

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