The Danger of Real Estate Incentives


Agents love to move property with subsidies. Trouble is, they don't figure into national home-price data, and they might may be masking a much steeper downturn

Real estate agent Chris Elizabeth Griffith tells her clients they need to be creative to lure buyers. In Bonita Springs, Fla., a Gulf Coast community crowded with vacation homes and newly built condos, she suggests her sellers offer to pay a year's worth of association fees, annual property taxes, or closing costs. Her favorite tease to put in home listings: "Call for the latest juicy incentives."

The practice, which popped up last year as a way for builders to move unsold inventory, has now spread aggressively to the existing-home market, which accounts for 85% of all sales. And it's not just furniture being used to sweeten the deal. The latest trend is cash enticements to the tune of tens of thousands of dollars. There are no national numbers, but in the Washington area, deals with some form of seller subsidy jumped from 35% to 58% in two years, according to Lisa Fowler, a researcher at George Mason University's Center for Regional Analysis. The average home sold there for $470,000 in April, with a subsidy of $9,700.

Such a rise has serious implications. The incentives, which don't figure into the national home-price data reported by industry groups, may be masking a steeper downturn. Fowler found that prices in D.C. fell by 0.2% over the past year if incentives were included, compared with a 0.7% rise if they weren't.

Red Flag

Subsidies aren't new. But the latest surge, fueled by the huge run in prices in recent years, may have legs. Given all the equity that sellers have built up—some $10.9 trillion, according to the Federal Reserve, vs. $7.8 trillion in 2002—they usually don't mind forking over some of their gains to get the deal done. Buyers often find a subsidy more appealing than a lower price, since it means they don't have to put up as much cash. "Part of it's psychological, but part of it is financial," says Fowler.

The most aggressive deals may be downright fraudulent. Lenders scrutinize transactions to make sure any cash subsidies go toward legitimate home expenses and aren't a way for the buyer to avoid a required down payment. Generally, if the incentives top 6% of the purchase price, it's a red flag. "These days you cannot get into a home unless you're putting some money down, at least 10% for those with less-than-stellar credit," says Frank McKenna, chief fraud strategist at BasePoint Analytics, which analyzes mortgage data. "If borrowers are subverting that by getting cash back from sellers, that's when lenders consider it a misrepresentation, or fraud."

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