Often, the most enticing incentive for a home buyer is a lower priced house. That lesson hasn't been lost on builders in the Chicago area and nationwide. In the wake of the expiration of the Federal Home Buyers Tax Credit on April 30, the most popular incentive being offered today is a discount on the asking price of the home, as opposed to more elaborate promotions.
"Right now, it's dollars off," says Jeff Benach, executive vice-president of Lexington Homes, builder of the town home communities Lexington Square in Bridgeport, Lexington Park in Des Plaines and Willow Place in Wheeling. "For the most part it's pricing. Most stuff I've seen out there in terms of flag-waving, traffic-driving promotions is, 'Look at all you're getting for a specific price.' "
That's not to say other incentives aren't being dangled before buyers' eyes in the wake of the tax credit, but they are used less often than lower prices.
According to a survey conducted in June by the Washington D.C.-based National Association of Home Builders (NAHB), 12 percent of builders reported using a new incentive for the first time to replace the benefit of the expiring tax credit. About 15 percent of the builders reporting were altering a currently used incentive to add some sales punch, due to the expiration of the tax credit.
However, more than three quarters of builders had been using at least some incentive during the tax credit period, and planned to continue.
In February 2009, 85 percent of builders used at least some incentive. That number dropped to 79 percent by January 2010 and further declined to 76 percent in June 2010. Fifty-four percent of builders reported home price discounts after the tax credit expiration, 50 percent offered options or upgrades at no or reduced costs, 44 percent offered closing costs or fee payment, 32 percent offered green features at no or reduced cost, 25 percent gave assistance to buyers selling existing homes, and 23 percent absorbed financing points for buyers.
Most common incentives adopted or altered in response to the tax credit's end were options or upgrades at no or reduced cost, and discount home prices.
Among the above incentives, one stands to gain ground over time as a more important strategic choice for builders, says Stephen Melman, NAHB director of economic services, economics and housing policy.
"In the current financial climate of record low interest rates, higher credit requirements might make [builder-provided] help with closing costs an increasingly effective incentive," Melman reports.
Also revealing was the way incentives were promoted. When asked if their incentives were being advertised or marketed as a replacement for the Home Buyer Tax Credit, 81 percent of builders responding said no.
Lexington Homes is among those 81 percent. It and other builders instituted $8,000-off-and-more programs to replace the tax credit immediately after its expiration, Benach says. But today, "many builders are not saying anything about the credit," he adds. "The thinking is, 'Out of sight, out of mind.'"
In the Chicago area, the most popular incentives other than discounted home prices are closing cost credits, mortgage rate buy-downs, longer warranties and free parking spaces in condo buildings, says Tom Bothen, director of graduate studies for the real estate program at University of Illinois Chicago.
As that observation suggests, not every builder is simply lowering prices. At Wheaton-based J. Lawrence Homes, president John Wozniak says his company hasn't lowered prices much this year, because "there's no more room to give up," he says. Instead, the company is offering more attractive deals on a wide range of accessories, patios, custom paint and sunrooms, he adds.
"We've been doing some custom options lately," Wozniak says. "For instance, we've offered buyers a Chef's Delight kitchen package with upgraded appliances, a nice dishwasher, granite countertops and 42-inch cabinets at Ambry Estates in Lynwood, our newest single-family-home community."
Meanwhile, at Midlane Club in Wadsworth, J. Lawrence Homes is offering 30 percent off all upgrades, including wood floors, full basements and fireplaces.
"Anything they would want upgraded, including light fixtures, faucets . . . will be on sale during the last two weeks in September and all October," he says.
Buyers also are benefiting from flexibility on the part of builders. At J. Lawrence Homes, "People know they can trade those upgrades for prices off closing costs or lower points, which can be the added burden when it takes additional cash to close on the house," Wozniak says.
James and Rebecca DeShazor were among recent J. Lawrence Homes buyers who were influenced by builder-provided incentives, which "allowed us to buy a bigger home," James DeShazor says. The DeShazors bought a two-story, four-bedroom home at Midlane Club at the end of April, availing themselves of what DeShazor estimates were builder-provided discounts totaling $9,000 on the home, as well as the $8,000 Home Buyers Tax Credit.
The DeShazors had been looking at homes since last October, knew the market and had gathered significant savings. They jumped at the chance to grab the incentives. "Instead of ending up house poor, we took the money we saved and put it back into our savings," James DeShazor says.
"We went out and bought energy-efficient appliances, and will be able to take advantage of that on our federal income tax filing for 2010 next year," he adds.
Taking a different approach to incentives is Schaumburg-based William Ryan Homes, a national single-family production home builder, with new home communities in Elgin, Volo, Lockport, Shorewood and soon in Naperville.
William Ryan Homes offers its customers $20,000 each to use in any way they choose, says vice-president of sales and marketing Debbie Beaver.
"That can be to pay for closing costs, to buy options for the home, to buy down their interest rates and if they're really close they can buy down the base price of their home," she says. "Or they can receive a free finished basement."
As this program's design indicates, William Ryan Homes believes in customers being the best arbiters of what's most appropriate for them, whether its free closing costs or free options. "We're customer driven by design, so we're interested in what works best for each customer," Beaver says. "I'm not going to offer a free gourmet kitchen if that's not what all my buyers want."
At Optima Old Orchard Woods in Skokie, a distinctive promotion has helped lure new buyers, despite the sluggish economy. Designed by nationally-known architect David Hovey and constructed by Optima Inc., Hovey's design and development company, Optima Old Orchard Woods is a community of 646 condominiums in three interconnected towers. Sales have benefited from a unique incentive introduced under the heading of the "20, 20 Promotion," so named because it provides a 20 percent discount on select condominiums for buyers who purchase by the Nov. 20 deadline.
Residences offered in the 20, 20 promotion include one-bedroom units discounted from $259,700 to $199,320; two-bedroom designs reduced from $343,900 down to $275,120; and three-bedroom floor plans that have been discounted from $511,550 to $409,240.
FHA loans are available to qualified buyers with 3.5 percent down, and qualified veterans are eligible for VA loans with zero percent down.
Just do it
UIC's Bothen believes buyers "by all means" should grab the incentives now offered. Doing so can save them up to $50,000 in feature upgrades, decorating credits and mortgage point buy-downs on some higher-end homes, he says.
"From my standpoint, longer warranties, free parking spaces in condo buildings, mortgage rate buy-downs and appliance and feature upgrades are the best incentives," he says. "These are ones that reduce out-of-pocket costs."
By most accounts, incentives are bound to end sooner rather than later. Builders know, Bothen says, that in a struggling economy like this, the use of incentives spurs buyers to purchase sooner rather than later. "It tends not to increase total sales, but rather to steal sales from a future period," he says.
Benach predicts incentives will disappear. "Before all this started, builders didn't negotiate," he says. "When we get to some new state of normalcy, and prices come back up, builders will get back to saying, 'This is the price.' Builders have to get away from the idea that there's space in the price. That might happen sooner rather than later. You can incentivize two ways. You can throw in some extras, or price just right, and educate buyers as to why this home is a better value than what you'll find elsewhere in this area."