In this podcast, our consulting leaders Dean Wehrli, Lesley Deutch, and Pete Reeb provide tremendous insight on the rising incentives required to sell a home today. Dean notes what is different this time:
“Buyers have never been more savvy….They’ve never had quicker and more complete access to information.”
Builders are increasingly using incentives to sell homes. Incentives are a special offer to:
- Sweeten the deal to entice the buyer to buy now
- Control the pace of sales to match construction
- Preserve value on the homes already sold in the community
Incentives are currently far more prevalent in higher price points and on the West Coast than elsewhere.
Our three leaders note that the four most effective incentives today, in order, are:
- Traffic generating. Builders who advertise increased broker commissions and lower mortgage rates are enticing buyers into their sales offices.
- Increased commissions. Pete says ~90% of California new home communities have increased broker commissions, and Lesley has seen the commissions in Florida reach as high as 5% for domestic buyers and even higher for brokers who bring international buyers (who usually purchase with cash). Pete knows of one community with $1.5 million homes for sale that offers $100,000 (6%+) in broker commissions.
- Lower mortgage rates. Up to 75% of California builders are advertising lower rate mortgages, usually for the first 2–3 years, and sometimes for the life of the loan. To offer this incentive, the builders will write a check to the lender at closing to compensate them for offering a lower mortgage rate. While somewhat effective in luring prospective buyers, Pete and Lesley have found that most buyers would rather have cash today than cash in the future.
- Saving the buyers cash today. Buyers love having builders pay their portion of the home closing costs since that saves them money today. This is especially true at the lower price points and with high LTV buyers.
- Providing buyers with a nicer home. Builders also offer discounts on home upgrades. This is especially effective at the higher price points where buyers are purchasing their dream home. Since the upgrades have a builder profit margin, a $20K allowance at the design center might only cost the builder $10K.
- A lower price. Actual price discounts are still rare, especially in the Southeast. The most notable discounts have been at a few recently opened projects that were overpriced or poorly executed, and in a few very high-priced submarkets that also experienced a surge in new home competition. Aside from those, the discounts mostly come in three forms:
- Completed homes. Volume-oriented builders don’t hold onto fully completed, unsold homes for long. To drop price without impacting the value of previously sold homes, builders will lower or eliminate any lot premium or not charge full value for the upgrades already included in the home. In early 2018, home builders ramped up construction in anticipation of strong sales and to keep their trades busy due to the labor shortage. That gamble hasn’t paid off, as many of these builders now have more completed unsold homes than planned.
- Advertised price cuts. Some builders have clearly marked the discounts on their price sheets available in the sales office. Buyers then take these sheets to other builders and ask them to do the same. Builders, particularly in Northern California, report that the first words out of a prospective buyer’s mouth tend to be about the discounts available.
- Hidden incentives. Increasingly, when the builder senses that a discount will work to get a wavering buyer to close, they will offer a last-minute price cut. These incentives are more difficult to identify, but we have seen them by examining public records as well as interviewing competitors who often hear about these incentives from the buyers themselves or from contacts at a competitive builder. Publicly traded builders are known to offer these incentives at month end, quarter end, and especially at year-end.
Looking forward into their crystal balls, our consultants note that incentives are likely to continue now that “the incentive train is rolling,” but they and their builder clients are not panicking. The combination of a strong economy, rising wages, lower mortgage rates, higher loan limits, a seasonal pickup in demand, and less speculative construction (yes, you heard that right, building products companies and subcontractors) should bring more stability to the market over the next few months.
Pete, Dean, and Lesley provided great insight on California and the Southeast. For additional insight on the Northwest, Southwest, Texas, the Midwest, and the Northeast, contact us.
Finally, if you are a client of ours and missed our hour-long training session on how to price your current and future communities in an incentive-heavy market, please contact one of our team members, who will be happy to send you instructions on how to access the video recording.
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