A Seller Buydown is a permanent rate reduction mortgage that lowers the buyer’s rate and payment and is paid for by the seller.
In a purchase transaction, the Seller Buydown process involves a seller contributing a financial credit (seller’s concession) towards the buyer’s cost of obtaining a below-market mortgage rate. Common reasons for this are getting the lowest possible mortgage payment possible, improving affordability, increasing the purchase price range, or lowering rates on Non-QM or investor loan programs.
The best market conditions for the Seller Buydown to be most effective is when there is a balance in supply and demand that favors the buyer due to competition in listing inventory. This scenario allows the buyer and agent to negotiate with the seller for a Seller Buydown versus a price drop.
Higher rates bring the Seller Buydown more into focus for buyers. Knowing the strategic ways of marketing and selling homes in a high inventory marketplace is how we create permanent and valuable relationships with the listing agents who are holding a surplus of listings that may have been on the market too long.
While we call it a Seller Buydown Mortgage, buyers, sellers, and agents tend to understand this loan option best when explained in terms of being a permanent rate reduction or seller credit to a buyer’s interest rate.
A simple way to look at the math is that a $1 rate buydown has a similar impact of a $3 price reduction. For example, a $15,000 rate buydown could equal a similar monthly mortgage payment as a $45,000 drop in the sales price assuming a 0.25 reduction in rate for every 1 point paid by the seller on borrower’s behalf. A Seller Buydown Mortgage can, on average, save a borrower up to three times more in monthly payment when compared to a simple price reduction.
A critical point often overlooked by agents is the fact that the buyer gains an immediate financial benefit since the seller is funding the permanent rate reduction and there is no out of pocket cost to the buyer. One of the most common misunderstandings by agents is that a buyer would have to spend 3-5 years with the property before their savings in payment equals the cost of a buydown rate.
However, in a scenario where a seller and buyer are negotiating a price drop, the better deal for the buyer is to apply the seller’s donated equity to a rate reduction versus a lower price. This strategy is a win-win for the buyers, sellers, as well as both representing agents, because the buyer can get the affordable payment they need to purchase the home they want and the seller is now able to net the cash they may need to make the transaction possible.
A Seller Buydown is a strategy for both buyers and sellers.
The Seller Buydown strategy is a multifaceted solution and acts as an equilibrium to balance out a seller and a buyer in a real estate transaction. It allows a buyer to purchase property and achieve the financial benefits they might need or want to move forward while still allowing the seller to maximize the most amount of equity from the sale of their property. Both parties benefit from this strategy.
A property priced fairly that sits on the market for a long period of time can lead to offers that could potentially lead to the seller losing money should they have to accept under certain circumstances. Meanwhile, a buyer may be able to afford the home at a fair price if they utilize the Seller Buydown strategy that would allow them to make the right offer that benefits both the buyer and the seller. So, instead of suffering a costly price drop, the seller can sell their home at the price that makes the most sense, and the buyer can get the home they want without compromising their financial goals as well.
For the buyer, this strategy allows for deeper financial benefits as opposed to traditional strategies in which a down payment is decreased or a lower offer is made to the seller in order to achieve a payment based on qualification.
For the seller, this strategy can significantly reduce the time their property sits on the market and decrease lowball offers. When a property sits on the market for a certain amount of time, the seller is then pressured to drop the price of their listing in order to entice buyers while compromising their own financial goals in the long run. If the property is listed at a fair market price and the real estate agent has done their due diligence by pulling up the comps in the neighborhood, the Seller Buydown strategy can be the best strategy for both a buyer and seller.
When selling your home, the goal is to walk away with as much money in your pocket as possible after the sale is complete.
Your real estate agent will typically offer you a couple of strategies for making this possible. Usually, the first strategy is to list the home for the highest possible price and see if anyone will pay it. But if your initial sales price is not attracting buyers to your home, a Realtor unfamiliar with seller buydowns will often start reducing the price after a few weeks to try to draw more attention to the listing.
The biggest problem with this strategy is that now every buyer scouring the internet can see that you’re already reducing your sales price. Magically, offers from buyers start coming in— but now even lower than you ever wanted to go.
The second strategy is to list the home below market price to attract buyers immediately. More buyers competing against each other should, theoretically, drive up the sales price. Sure, this strategy can work in specific markets, but it is never guaranteed you will get enough buyers competing so you can sell the home for the best possible price. And once you’ve listed it at a certain price point, suddenly increasing that number to where you really wanted it to be just won’t be possible.
A much smarter way to sell your home for more exists, and taking advantage of it is as simple as finding the right Agent with whom to work.
This leads us to the third and far better way to structure the final sales price that will allow you to sell your home for the highest price by helping the buyer get the payment they want.
A buyer using an interest rate reduction strategy can afford to pay a higher price for your home because you are going to help them qualify for a below-market interest rate.
Understandably so, buyers care mostly about their mortgage payment— and you care primarily about net proceeds from the sale. An interest rate reduction strategy helps both of you get what is most important to you.
A Realtor unfamiliar with seller buydowns will typically recommend that you keep lowering the sales price until buyers stop making below-asking price offers, while an experienced Realtor will use a counteroffer to make the buyer an offer that they cannot refuse, and you feel great about.
There are many ways you can use an interest rate reduction strategy to your advantage. For example, let’s say a buyer offers you $30,000 below what your asking price is. We can assume that the buyer is making an offer at this price because that’s the payment that they can afford.
Instead of lowering your sales price, you can offer credit from your proceeds to permanently reduce their interest rate and payments. Essentially, what you are doing with your counteroffer is telling the buyer, “I’ll help you get the payment you want if you help me get the sales price that I want.” That’s called a win/win negotiation.
First, did you know when you qualify for a home loan, you’re actually qualifying for the monthly payments?
We know that for a home buyer, nothing takes priority quite like having an affordable mortgage payment. The price you’ll be approved for depends entirely on both your down payment and the maximum payment for which you qualify. And the most significant factor in determining what that payment will be is your interest rate.
For those buyers who opt to use an interest rate reduction mortgage, your real estate agent will negotiate with the seller to accept a fair price if they will give you credit to permanently reduce, or buydown, your interest rate.
Just a reduction of 0.25% in your interest rate could mean tens of thousands of dollars of interest that you will save over the term of your home loan. And this, of course, can mean the difference between affording your dream home and going with option B.
Using this credit (also known as a seller’s concession) to permanently lower your interest rate will lead to a reduction in your mortgage payment, allowing you to afford a higher sales price while keeping your payments right where you needed them to be all along.
At the end of the day, this is a win-win situation for both the buyer and the seller of a home.
The seller benefits as much as the buyer in that the seller gets the offer they wanted, and your below-market interest rate means a lower total payment— even though you offered a fair purchase price at market value.
You may be thinking, “Why don’t I just ask the seller to reduce the price of the home?”
That’s a great question, and most buyers are going to default to assuming this is the way to go. But using an interest rate reduction mortgage means your offer will stand out from the competition. A higher offer gives you a higher chance of sealing the deal.
Because it’s been established you aren’t trying to take any precious money out of the seller’s pocket (by having to make a lower offer), your far more desirable offer will inevitably stand out from all of the other buyers trying to get the lowest price possible.
While a desperate seller may take a low offer, most sellers are going to take the offer that will allow them to make the most money from the sale. Period.
If your offer keeps your payment where you want it to be while the seller also gets what they want, then everybody wins.
A successful negotiation is when all parties feel like they got the best deal. You get your payment. The seller receives their money. Everybody wins.
Have you ever used an Interest Rate Reduction Mortgage as a negotiating tactic? This unique mortgage program will help sellers net more from their sale and help the buyer lower their payment (so they can afford a higher sales price). Your knowledge and experience with this technique will differentiate you from the fierce competition in your market.
When you represent your buyer in a transaction, they are already pre-approved at where they want (or simply need) their payment to be. Depending on today’s interest rates and your buyer’s down payment, your price range for this homebuyer will be pretty well established.
By using an interest rate reduction mortgage, you’re negotiating a seller concession that will be used to buy down your buyer’s interest rate permanently. The result is that you and your buyer can make offers in a higher sales price range while preserving the payment your buyer needs to feel great about becoming a homeowner.
In a rising interest rate market, you are continually chasing affordability when determining what price for which you can place your seller’s home. When rates go up, offers begin rolling in lower and lower as buyers desperately try to keep their payment affordable.
Countering below-market offers with an interest rate reduction mortgage can rapidly open up the buyer pool, and increase the net proceeds to your seller.
An example of this would be when offers are consistently coming in at let’s say $30,000 below asking price. You now have two options: you can reduce the sales price by $30,000 and accept one of those offers, or you can help the buyer keep their payment the same while buying their desired home at a price much closer to your original asking price.
When using an interest rate reduction mortgage, every dollar in seller concessions that your seller offers to the buyer to permanently buy down their interest rate, that buyer can now afford more of the purchase price while keeping their payment the same as if you had sold them the home at a lower price.
Selling at a lower price only helps the buyer, not the seller. And let’s face it: a higher commission is always desirable for an agent. By offering to pay discounted points for the buyer, your seller nets an additional $2.00 for every $1.00 they give to the buyer.
In the above example, instead of reducing the price by $30,000, your seller pays $10,000 towards lowering the buyer’s interest rate. This gives the buyer a similar payment as they would have if you sold the home for $30,000 less.
Your seller now pockets an additional $20,000 from the sale, and you just prevented a low comparable from hitting your local market!
Win, Win, Win.
This is the only negotiating strategy out there where literally every single party in the transaction walks away feeling like they got a great deal— including you.
Your seller nets more. Your buyer can afford more. And you preserve home values in your farm. Everybody wins when everybody wins!