How to Sell in a Buyer’s Market: The Buy Down

By Raymond Stoklosa · April 8th, 2008

A client and I were brain storming this weekend about ways to make her home stand out from the crowd of homes listed for sale in San Mateo County, California. I suggested that we offer more favorable terms for the buyer. With the mortgage scare and credit requirements tightening, buyers are looking for help. In my three decades of experience, I’ve found that one of the most effective things a home seller can do to get his or her home sold is offer more favorable purchase terms than their competitors.

A classic technique is for the seller to “buy down” a portion of the financing costs by agreeing to pay extra “points” (also called discount points) to reduce the buyer’s interest rate or other financing costs on the loan. A point equals one percent of the loan amount… 2 points equals two percent of the loan amount and so on. The buy down makes it easier for the buyer to qualify for a loan because it lowers the rate of interest charged.

Generally, there are two kinds of buy downs: a permanent buy down and a temporary buy down. A permanent buy down lets you pay extra points upfront to get a lower interest rate over the life of the loan. A permanent buy down can be paid by the seller (or builder) as an incentive to finalize a sale by creating lower monthly payments over the life of the loan. A temporary buy down reduces the monthly payments over a limited period of time.

The buy down can benefit the seller in a variety of ways:

It can provide added value to the property

It could allow more buyers to qualify

It may reduce the possibility of a price reduction

It is usually significantly less than a price reduction

There are real advantages for the buyer too, such as:

A below market interest rate

Reduced monthly payments

Increased purchasing power

Interest rate adjusts at a lower level after fixed period ends

The difference between the “real note rate” and the lowered rate is paid in cash by the seller

Even in a buyer’s market, you can still get your home sold quickly… just get creative.