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The Basics of Builders' Incentives

Aug 1, 2008
Home builders who have surplus inventory on their books are coming up with creative ways to entice buyers into making a purchase offer. In an effort to make a house more attractive to potential buyers, these builders are offering what are known as "buyers' incentives" or "builders' incentives." These can include pricey electronics such as flat screen TV's and stereo systems, or more traditional add-ons such as furniture and art work.

As certain markets around the country become more competitive and housing sales stall, builders are forced to offer higher ticket items such as brand new cars, vacations, and gas cards. While this may seem like a costly way for a builder to do business, if it means a sale, then it's worth it. Spending money on a new car can offset the potential losses that the company will incur if the house remains vacant, where it will lose value every day that it sits on the market.

Flashy incentives can bring a lot of foot traffic to open houses and showings, which increase the chances of a sale. People like to think they're getting something for free, so buyers' incentives grab a lot of peoples' attentions. However, it is important to remember that getting a free car isn't going to do anything to lower your monthly mortgage payments, or reduce your interest rates. In fact, the car may simply be added onto the purchase price, which means that you're paying for it with your home loan.

It is important when dealing with buyers' incentives that you look at the offer with a critical eye. Is what the builder offering something that will benefit you in the long run? Or is that high-end stereo system something that you could easily do without? And be sure that the incentive isn't distracting you from what you should be focusing on --the house. You don't want to be lured into making an offer simply because the incentive is so attractive. Make sure that the house is right for you and your family, and that you would be willing to make an offer even without an incentive attached to the deal.

If you have any bargaining power, try to nix the incentive, and get a reduction on the purchase price instead. This will pay off much more in the long run. If they won't budge on price, see if the seller will consider covering your closing costs, or making the first few mortgage payments for you. Anything that you can do to lower the amount you have to spend on the property, the better. A plasma television will do nothing for your pocketbook, whereas having even a slight price reduction will drastically reduce the amount you have to pay back on your mortgage in the future.

One thing to be wary of however, is the tendency for builders to only offer reductions and certain incentives to buyers who use the builder's official lending company. Because you might find a better deal with an independent lender or broker, it's a good idea to look at what discount the builder is offering, and compare it to the savings you would get by using an independent mortgage broker.
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