What is a Seller Buydown and Why It Matters to Buyers and Sellers

What is a Seller Buydown and Why It Matters to Buyers and Sellers

Introduction and the Scenario

Hi, my name is John Peña. I'm a local real estate agent here in El Paso, Texas.

And I'm Danny Yale. I'm a local lender here in El Paso with People's Mortgage.

We are excited to bring you some information on the contractual negotiation, money side of a real estate transaction. I think this is going to have some far-reaching implications, not only now but into the future as the market shifts. Right now we're in a seller's market, but we are starting to transition more to a space of balance, and who knows, maybe even a buyer's market. What we're going to talk about today is a little heady, a little more on the financial side, there's some numbers involved, but if you're a buyer or a seller, I think this could be really important information to understand, and Danny's going to help us do that.

So let me set it up here. Let's say we have a seller who's going to sell a home for $439,000. Now in El Paso, this is a bit of a higher price point, and homes like this don't just jump off the shelves. So homes at this price point may take a little bit of time to sell, or they might take a long time to sell. Once you start getting into 30, 40, 50 days, all of a sudden the seller is going to be getting nervous. They're going to be thinking about dropping the price. They're going to be in a mild state of panic, and rightly so.

However, we've got a situation that Danny is going to explain to us, that involves, instead of the seller lowering the price of the home, which never looks good, offering concessions to a buyer to help the buyer's overall monthly payment go down. This is called a seller buydown. We've got an image up here on the screen where you can follow the numbers, but we're going to let Danny talk this situation through.

Seller's got a home at $439,000. It's been on the market, let's say, over 30 days. They're getting nervous, they're thinking about lowering the price. Maybe a buyer is out there who likes the home but doesn't want to overpay for it, or is very concerned about their monthly payment. So we're looking for a win-win compromise, and I think this might be it.

Breaking Down the Buydown

Absolutely. Thanks, John. In this situation, price point $439,000, house has been sitting on the market a while, what's a seller thinking when they're going to make an offer? Can I go in and lowball this? Can I maybe get it for $400,000, $420,000? And what's a seller thinking? Maybe I've got to drop my price. Maybe I've got to take this lowball offer. Maybe I'm going to get $20,000 or $40,000 less for my house than I was hoping for, which is a huge decrease in what they're expecting, the proceeds.

Let's say the house were to sell at the list price of $439,000. A buyer putting 10% down is going to have a monthly payment right around $3,700 a month.

Now let's say the house doesn't sell at that $439,000 price, and the seller thinks, maybe I'll drop the price. I'll reduce it down to $427,000, a $12,000 drop. Well, that only changes the monthly payment by about a hundred bucks, and I don't know about you guys, but $100 is not a difference that's going to make me jump at buying a house, or say no thank you.

So what I'm suggesting is that instead of dropping the purchase price of the house, we keep it at $439,000, but we drop that monthly payment by much more. The way we do that is by getting the buyer a lower interest rate. To do that, we ask the seller to contribute $12,000 towards closing costs. By doing this, we can buy the interest rate down and get a monthly payment about $280 cheaper.

Now that is pretty significant in terms of monthly budgets. And in terms of this transaction itself, that's equivalent to the seller dropping the price by about $50,000. So all things being equal, this is a situation where the seller only has to give up about $12,000, and the buyer gets a monthly payment equivalent to if they'd bought the house for about $390,000.

That's a perfect situation where you get creative with financing and negotiation, and you get everybody on board to get the most for the seller's proceeds while also helping a buyer get into a house at an affordable monthly payment. And that's what John and I are all about, working together and helping you, whether you're a seller or a buyer, get what you're looking for.

Why It Works for Both Sides

Yeah, absolutely. And it's perfect, because for a seller, they still sell the house for that asking price, $439,000. Now, are they giving up $12,000 of their profit? Yes. So really they're taking $427,000. But trust me, if you have to lower the price of your home and it's already been on the market for 30 days, that is just one more red flag, and you're not going to have a lot of people super excited about your home. You may have to do a second price reduction later on down the road. So yes, for the seller, you're giving up $12,000 of profit. We completely understand this. However, you're avoiding some really big pitfalls that could potentially keep your house on the market for a considerably longer time.

For the buyer, this is great, because you're getting your monthly payment lowered by almost $300 in this particular case. That's a meaningful change. So for the buyer who was maybe tentative, maybe they love this house but they were a little bit afraid of that monthly mortgage payment, this is good for them too. It helps them justify: all right, I can afford this home, and this is the way that we're going to do it. So yeah, I think it's a great option.

And again, right now we do find ourselves still in a seller's market. There are going to be plenty of sellers who price their home appropriately, get multiple offers, and sell it for what they want to sell it for. But for other sellers, especially in that higher price point, once we start going $400,000 and above, there's a lot less buyers in that space. So I think this is a pretty great tool to at least have in your tool bag, as they say.

Absolutely. Thanks, guys.

Yeah. Thanks.