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Builders Work With Lenders to Heat Up Sales in Chilly Markets
 Entering the fall months, home builders from around the country are reporting success in boosting sales in a cooling marketplace by partnering with lenders to provide financial incentives for their buyers, according to information published in NAHB’s Back to Basics toolkit.
Introduced last month, the online kit is designed to provide association members with materials that will help them respond to the new challenges of today’s slower environment for home sales.
“Builders and our builder joint venture partners have been contacting us about how we can partner with them to sell more homes as they get ready for the fall market,” says Paul Fazzini, vice president of American Home Bank in Lancaster, Pa.
One proven option for registering more sales is to partner with a preferred lender and provide affordability tools to buyers, Fazzini says. Many of these tools can work quite well in the current marketplace, where high home prices have become the key factor discouraging prospective buyers. As a result, consumers are finding they are able to qualify and afford the home of their dreams now, he says, instead of waiting for interest rates to drop further or their incomes to increase.
Howard Hirsch, of Keystone Custom Homes, said that he has worked with American Home as his preferred lender and joint venture partner to design financing incentives that reduced the monthly payments from $1,643 using conventional financing, to $1,124. The substantial reductions in payments enabled him to sell 18 homes in one weekend, he said.
“Qualifying for homes was made easier, and several buyers found they could buy a new home for less than the payment on their old home,” Hirsch said. With half of the customers providing construction-to-permanent financing, Keystone reduced the risk of walk-aways.
Another builder designed a program to sell spec homes in his inventory, using an incentive that reduced the mortgage payment from $2,100 to $1,700. Not only were a number of specs successfully sold, but traffic generated by the special financing offer resulted in several additional sales.
Still another builder used a lender’s program to offer borrowers 95% financing with no mortgage insurance payments and without the hassle of a first and second piggyback mortgage. And another used a construction-to-permanent loan tool that required no payments during the construction period and pays the builder directly within 48 hours of a draw request.
Among financing options are buydowns, forwards and construction-to-permanent financing. “These types of preferred lending arrangements are not usually found in a typical commercial banking environment,” Fazzini says, so builder should consult with their preferred lenders to find out what incentives will give them the “most bang for the buck.”
The Back to Basics article provides a description of several financial strategies that can help sell homes:
- Buydowns. In a builder buydown arrangement, the builder purchases or “reserves” a block of funds from his lender for an extended term. These funds, temporarily owned by the builder, are ultimately used to issue mortgages to the buyers. By buying in bulk, the builder is able to offer potentially below-market interest rates to his buyers.
Builder buydowns give buyers a rate reduction in the first years of the mortgage loan. The most common buydown, a 3-2-1, reduces the mortgage interest rate by 3% in the first year, 2% in the second year and 1% in the third. The interest rate is then fixed for the remaining term of the loan. The advantage for borrowers is that they are qualified for the loan based on the second-year rate, not the end rate.
- Forwards. Forwards lock in interest rates to both attract and comfort buyers who might be concerned about finding a rate and locking it in now. The lower rates also allow more buyers to qualify. Forwards are most attractive in an environment in which interest rates are rising, and when the time comes for the buyer to close on the loan, enable builders to provide mortgage funds at potentially below-market rates, and sell more homes.
- Construction-to-Permanent Loans. A CTP loan replaces the traditional two-pronged process of a construction loan and end loan, and instead allows buyers to close on their permanent mortgage when they break ground.
Consumers like CTP loans because they have the option to lock in an interest rate at groundbreaking, to know the amount of their end loan immediately and to have the advantage of building equity from the first payment. Builders prefer the loans because they receive payment on their land immediately, and are not exposed to the risk of rising interest rates and increased carrying and supply costs. In addition, walk-aways become virtually nonexistent, since customers own the home from the first day.
All of these options are designed to get the customer in the home as soon as possible with a loan they can afford. The added advantage to builders is that they are able to keep their inventory moving, maintain control, sell more homes, and make more money.
“Time is of the essence and it pays for all of us to be flexible and nimble in this environment,” Fazzini says.
To access the Back to Basics toolkit, NAHB members can go to www.nahb.org/toolkit. You must be an NAHB member and have a login to www.nahb.org to view this product. To create a login, go to www.nahb.org or click on the log-in button on the main menu bar. If you need assistance, call the NAHB Member Service Center at 800-368-5242.
For more information about American Home Bank’s joint venture Web site, click here.
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