Buying Down Interest Rates For Your Buyers Instead of Discounting The Price

At our monthly real estate investor meeting last week (here in Northern Colorado), I discussed with the group my preferred strategy for getting a huge marketing advantage to sell houses quickly for full price. This is the strategy I recommend BEFORE deciding to drop the price on your properties. It is especially effective with low interest rates.

Here's how it works. Let's say you are trying to sell a $200,000 home and you'd consider dropping the price $10,000 and selling it for $190,000 to get it sold quickly. Rather than dropping the price $10,000, you might instead consider

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buying down the interest rate on the loan for your buyer. While, at the time of this writing, interest rates are below 7%, I will use 8% in my example to ensure its continued validity as interest rates rise. It is actually MORE effective at a lower interest rate, but it is still very, very effective even as interest rates do rise.

While the cost of buying down interest rates on loans varies, for $10,000 you should be able to buy down the interest rate by a full percentage point. In fact, it should be less than that, but I will use $10,000 as a high-end estimate to make this example more conservative.

I am also going to assume that the buyer is not putting anything down. I know this is unrealistic, but it will make it easier to illustrate the difference between the two payment amounts.

If, instead of discounting your price by $10,000 you reduced the interest rate by a full point, here's how the two loan payments would differ.

For the original loan of $200,000 for 30 years with an interest rate of 8%, payments would be $1,467.53 per month.

If you bought down the interest rate one full point from 8% to 7%, the same loan would have monthly payments of $1,330.61.

So, by buying down the interest rate from 8% to 7%, you increase the number of buyers that can buy your $200,000 house to include all those that thought all they could afford was $1,330.61 per month in payments.

Another way of looking at this is by calculating how much house someone could otherwise buy with a $1,330.61 payment at 8% and show how much more house they can buy with this strategy. Someone that could only afford $1,330.61 payments, would otherwise only be able to afford a $181,340 house. Now, you can show them how to buy a $200,000 house instead for the same payment.

Your buyer can buy more house, for a much lower payment--even lower than if you had discounted the property to $190,000--and you will significantly increase the number of buyers that can afford the payments for your house.

In summary, while you are still netting $190,000 for this $200,000 house whether you discount the price $10,000 or buy down the interest rate with $10,000, the huge advantage you have is a marketing one. A 5% price discount is much less attractive to most buyers than almost a 10% discount in monthly payments. Use this in your marketing and you have a significant advantage to help you stand out against other similar priced homes and, in a slow market, that is a critically important advantage.