Trend Spotter: The aroma of sizzling financing incentives
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Trend Spotter: The aroma of sizzling financing incentives

August 20, 2009

Okay, so there you are … going about your day minding your own business. You’re really not that hungry. You are quite comfortable, actually. Then, all of a sudden, out of nowhere, that tempting aroma of your favorite food sizzling on the grill reaches out and beckons you. It entices you. It awakens you out of your state of contentment. It demonstrates to you as plain as day how painfully hungry you really are. Finally, it arouses you to action; and before you know it you’ve taken your first bite! Yep. You’ve been there, done that.
What if we could figure out a similar way to entice qualified homebuyers and motivate them to go ahead and “take a bite” even when they are “not hungry” and the food available to them (in the form of available housing inventory) is so plentiful? What is it going to take in order to attract these buyers and arouse them to action? After all, if we can figure that out, we can almost guarantee an endless stream of referrals from real estate agents itching to get their hands on our secret recipe.
The problem: I’m not hungry … it’s a buyer’s market!
It is estimated that over half of all homes being sold in many markets are distressed sales involving some form of foreclosure or pre-foreclosure sale. It is further estimated that approximately 40 percent of all homes being sold are purchased by first-time homebuyers. Most of these first-time homebuyers and other buyers are getting their information from the Benevolent Society of Media (BS Media), the Internet Truth Factory (ITF), and relatives that all have Ph.D.’s in the housing and mortgage markets. These 24/7 noise machines have all conspired together and are successfully indoctrinating homebuyers into believing that they are not hungry after all. Didn’t you hear? IT’S A BUYER’S MARKET!
This presents two dilemmas for real estate agents, home sellers and the mortgage originators that work with them. First, how can you attract and motivate qualified buyers who are looking for the greatest deal of the century? Second, how can you help real estate agents and home sellers differentiate their listings and compete with all of the distressed properties on the market?
The solution: Put those financing incentives on the grill baby!
Consider this example illustrating how financing incentives would sizzle on a home that is competing with distressed property listings in the market:
                                                    Short sale listing................Your client's listing
List price...............................................$310,000............................$310,000
Buyer’s desired purchase price...........$280,000............................$295,000
Downpayment percentage.......................20%...................................20%
Downpayment funds............................$56,000..............................$59,000
Mortgage LTV...........................................80%....................................80%
Mortgage balance................................$224,000.............................$236,000
Points paid by the seller percentage........—........................................5%
Points paid by the seller funds.................—....................................$11,800
Mortgage interest rate..........................5.50%..................................4.25%
Mortgage payment..............................$1,272..................................$1,161
Monthly payment savings........................—......................................$111
Closing costs.......................................$3,000...................................$3,000
Closing costs paid by seller.....................—......................................$3,000
Buyer's downpayment & costs...........$59,000.................................$59,000
Time to close 3-6 months … maybe… Now!
Interest paid over five years............$59,423..................................$47,965
Savings over five years.........................—.......................................$11,458
Interest paid over 10 years..............$113,514................................$90,803
Savings over 10 years.........................—.........................................$22,711
Interest paid over 30 years..............$233,865.................................$181,952
Savings over 30 years.........................—..........................................$51,913
In this example, the buyer is looking for a 10 percent discount off the list price. With the short sale listing, the buyer is getting their discount by trying to reduce the purchase price. With your client’s listing, the buyer is getting their discount through seller concessions. As you can see, the seller in column number two is paying five points and the buyer’s closing costs. The bottom line here is that although it looks like the buyer is paying more for the house in column number two, they are actually paying much less. In fact, the buyer saves $111 in cash flow every single month for the next 30 years—that’s a whopping $39,960 in monthly payment savings over the life of the mortgage. Even though the mortgage balance is higher in column number two, the buyer saves $11,458 in interest costs over five years, $22,711 over 10 years, and $51,913 over the 30-year life of the mortgage.
To further add some spice and sizzle to this scenario, remember that points are tax deductible to the buyer even if they are paid by the seller. In other words, the buyer in this example (column number two) would be able to take an additional $11,800 deduction on their tax returns in the year of the home purchase without spending a dime out of their own pocket! A buyer in a 25 percent income tax bracket would experience $2,950 in actual cash savings when they file their tax returns. Who said first-time homebuyers making less than $75,000 per year are the only ones eligible for tax savings when they buy property? Furthermore, points are also deductible to the seller by way of reducing their capital gain on the sale of the property (if they have a capital gain).
Although the scenario illustrated above involves a 20 percent downpayment, this strategy can also be implemented in cases involving a 10 percent or even a 3.5 percent downpayment (Fannie Mae allows six percent seller concessions on loan-to-values [LTVs] up to 90 percent and the Federal Housing Administration [FHA] also allows six percent on LTVs up to 96.5 percent). As you can start to see here, properly structured financing incentives could be that missing ingredient that sellers and their real estate agents could utilize to attract buyers and make their listings stand out from the glut of inventory in today’s market.
Sellers could sell their homes much quicker and end up with the same bottom line sales proceeds if you successfully teach them and their real estate agents how to wrap their arms around this strategy. As a true mortgage professional, you need to be the one pointing this out to clients and referrals partners. You could help real estate agents and home sellers design marketing around these strategies and illustrate how their buyers could “save more than $50,000” on the purchase of their home versus comparable listings in the market.
The result: The sizzling aroma spices up your business!
Your business could literally skyrocket if you commit yourself to helping real estate agents and home sellers structure financing incentives like the ones illustrated above. Referral partners will be clamoring to get in on your secret recipe, and otherwise “not hungry” homebuyers will be awakened with a ravenous appetite to “take a bite” out of your offerings. Competitors will be sneaking over your shoulders, scratching their heads, and asking you: “Hey good lookin’! Watcha got cookin’?!”
Oh, and by the way, CMPS Institute is the name of the culinary school where you can acquire these and many more sumptuous recipes and skills that will make your business sizzle!
Gibran Nicholas is the founder and chairman of the CMPS Institute, which administers the Certified Mortgage Planning Specialist (CMPS) designation. The CMPS Institute has enrolled more than 5,500 members since its founding in 2005. Gibran is also the chairman of Published Daily, a customizable online magazine, newsletter and marketing service that helps professionals transform their clients and prospects into a referral-generating sales force. He may be reached at (888) 608-9800, ext. 101.

Compliance, Marketing, Originations, Residential, Marketing