That $35,000 Builder Incentive Is Not Free — Here's the Catch | Disclosures with Nick & Dave

Episode summary

Drive past any new-construction community in Clark County and you'll see the headline: $35,000 in flex cash. Nobody hands you thirty-five grand out of generosity — so where does it actually come from, and how do you squeeze the most out of it?

This one leans on Dave's background — he started his real estate career at New Tradition Homes and has since represented buyers with most of the builders in the county. We walk the full menu of incentives: temporary rate buy-downs (2-1, 3-2-1), permanent buy-downs, closing-cost credits, design-studio upgrade allowances, and a straight purchase-price reduction. Then the part most buyers never hear — why a builder will happily give you $35k in closing costs but fight you on taking it off the price: a discounted sale price becomes a public comp that sets the floor for every future sale in the community, and it can wreck appraisals.

The practical stuff is where it earns its keep. Why the temporary buy-down is the one we usually steer people away from (your payment climbs every year, and lifestyle creep eats the savings). Why design-studio dollars return only 50–75% on the dollar — so spend them on structural and behind-the-drywall work you can't add later, not on countertops you could shop yourself. The savvy buyer who took the base finishes on a $1M+ home and hired his own contractors two weeks after closing. The lender caps that can quietly limit how much of your incentive you're allowed to use — and where the unused portion goes (hint: back to the builder). And the flat-fee angle: builders typically offer buyer agents ~2.5%, so on an $800k home the gap between that and our fee comes back to you.

Hosted by Nick Aufenkamp and Dave Miller of The Tartan Team, brokered by Real Broker, LLC. Serving Clark County and Southwest Washington.

Run your own scenario: try our builder incentive calculator to compare a rate buy-down against closing costs, upgrades, or a price cut.

In this episode

[00:58] Dave's background: New Tradition Homes and the builder side
[02:34] The headline number — $30–35k in flex cash, and why it's never free
[03:55] Temporary rate buy-downs: how 2-1 and 3-2-1 actually work
[06:53] Why a temporary buy-down is really just prepaid interest
[07:52] Permanent buy-downs and the one-point rule of thumb
[12:06] Closing-cost credits — and why you can't touch your down payment
[13:22] What closing costs actually run (and the surprise for 3%-down buyers)
[17:10] Why lending guidelines block incentives from the down payment
[19:44] Design-studio credits and upgrade allowances
[24:13] The 50–75% return problem on upgrades
[28:35] What to actually spend design dollars on — structural, not surface
[31:23] The savvy buyer who took base finishes and hired his own contractors
[35:45] The fifth option: just take it off the purchase price
[36:42] Why builders resist price cuts — comps, appraisals, and the community floor
[41:56] How builders can afford this: economy of scale and forward commitments
[45:37] So which should you choose? Our honest ranking
[52:06] Lender caps — and how unused incentive goes back to the builder
[55:00] Register your agent, and why the model-home rep isn't your friend
[57:24] The flat-fee angle: builders offer ~2.5%, and the difference is yours

Links from this episode

Builder incentive calculator — run a rate buy-down against closing costs, upgrades, or a price cut
New construction in Clark County — communities and builders we work with
Episode 6 — Is Vancouver, WA Really Cheaper Than Portland, OR on Taxes? — the previous episode
Book a free consultation

Transcript

Lightly edited for readability.

Nick (00:00): Hey, welcome back to Disclosures with Nick and Dave. I am your host, Nick Aufenkamp, along with my wonderful co-host, Dave Miller. What's going on, dude?

Dave (00:08): Not a whole lot. Just a little Pacific Northwest overcast. We got the studio all set up, nice and moody. There's no place I'd rather be right now.

Nick (00:14): I also appreciate, for our listeners, that the first five minutes of every episode is just, "How's the weather in the Pacific Northwest?" Personal recap. No, it's good. Well — in the spirit of wasting no one's time, we've got a great episode today. What are we diving into?

Dave (00:38): Builder incentives, I think.

Nick (00:42): Yeah, that sounds more exciting to me than the taxes we were talking about.

Dave (00:52): Or the weather. I'm excited to get into this because I'd say it's fair to say this is somewhat an area of specialty for you, given your background in new construction — if you're unaware.

Nick (01:03): Yeah. So I got my start in real estate working for New Tradition Homes, which is one of the most highly regarded builders in Clark County — they've been around since 1984. I started working for them in 2021 and was with them for about two and a half years before going out on my own and starting The Tartan Team. But that was just such a great experience, and through that process I got to know a bunch of the other local builders. Since going out on my own, I've gotten to represent home buyers and have worked on the buyer side with most of the builders in Clark County. And really, ever since interest rates started going up in 2023, builder incentives have been a very common way that builders are trying to win business.

Dave (01:58): Yeah, no, I'm excited to hear your thoughts on it. So I think the rough show map is: we're going to explain what the incentives are, what the different options are, what the reasons are you might want to choose one versus the other, potential drawbacks to them. How to choose. Lending caps, trying to make sense of some of that.

Nick (02:34): And if you don't know what a lending cap is, don't worry — we're going to get into it. That's exactly why we're here. So yeah, let's go ahead and start. Because I think you see the headline number — I was actually just researching a bunch of the different local builders, and you see these headline numbers like thirty, thirty-five thousand dollars being offered to you in flex cash or closing cost credits or rate buy-downs. And that all seems like a really big number and seems like it could be exciting. I think most of us have also been around long enough to realize that nobody has just given us thirty-five grand out of the goodness and generosity of their heart. It's a significant chunk of change.

Dave (03:00): Yeah, there's no free lunch, right?

Nick (03:25): And so understanding: okay, where does that thirty-five grand — or whatever the offered incentive is — come from, and how can it best be leveraged? But maybe we start by just breaking down the menu of options, the most common incentives that builders are offering.

Dave (03:33): That's good. So what are we saying? What is the menu? What would you say you've seen is the most common?

Nick (03:50): The biggest one is a rate buy-down. And rate buy-downs can be broken into two different ways. There's a temporary buy-down — you'll see this advertised as like a 2-1 or a 3-2-1 buy-down. What this does is it significantly drops the interest rate for the first one, two, or even three years of the loan. On that 3-2-1 buy-down, for your first year your interest rate could be three percent lower than the market rate. So today we're at like a 6.7 — a 3.7 percent interest rate. Depending on the principal and the loan, that could easily drop your monthly payment a thousand, fifteen hundred dollars every month.

Dave (04:32): Which sounds awesome. So correct me if I'm wrong — my understanding in general is a 2-1 would mean that for the first year after purchase, the interest rate is two below whatever you get your actual loan locked in at. So let's just say six-point-seven for the example. The first year would be down two percent, and then the second year would be down one percent from that. So it would go from 4.7 for the first year to 5.7 for the second year. And then the third year your rate would revert back to 6.7.

Nick (05:13): Good clarification. And then it remains at that 6.7 from years three through thirty, unless you were to refinance or do something different. And while that can be great, especially for those first couple of years, we've got some cautions — maybe we'll get into that later — but essentially it's because as your rate goes up every year, so does your mortgage payment. Pretty significantly.

Dave (05:40): And something interesting to note and clarify with that is it's not actually like a different loan. The mechanics of how it works, typically, is that you have to qualify for essentially a thirty-year fixed loan at that rate that you're at. And then this buy-down is kind of like a separate pool of funds that gets applied to that mortgage payment. So that's important to note, because if you're really reaching at the top of your budget and you're like, "Well, if the rate was just a little bit lower, then I could get into that nine-hundred-thousand-dollar house" — you need to have the credit or the capital, or whatever the combination is, to actually qualify for the thirty-year loan or fifteen-year loan at the current market rate.

Nick (06:46): And we call it a buy-down, but the temporary — like a 2-1 or 3-2-1 buy-down — it's actually best to think about it as prepaid interest. The builder is saying, "Hey, we will prepay the interest on the first couple of years of the loan," because whatever that dollar amount is that they're giving you — we've used the example of thirty-five thousand dollars — that thirty-five grand is going to essentially equal thirty-five grand over two or three years in interest that you're saving. So it is a dollar-for-dollar savings. But your point stands — that's why you have to qualify for the full market rate.

Dave (07:23): And we'll probably get into a bit of the potential caution there, as you already alluded to — your rate's going to go back up. Okay. So we've got interest rate buy-down. You talked about 2-1s and 3-2-1s, which is what people have probably heard of. Maybe explain a permanent rate buy-down.

Nick (07:53): Absolutely. So if you're walking around and you see a sign that's like "three percent interest rate for your first year" — probably a temporary buy-down. But then sometimes you'll see a rate that's advertised that's like a percent lower, or three-quarters of a percent lower, than the usual market rate. And this often will be a permanent buy-down. What this actually is: if market rate today is 6.7, you could use that thirty-five thousand dollars from the builder and it permanently buys the rate down — that might be a full percentage point. You could be down closer to 5.7, and then you're going to have that fixed interest rate throughout the life of the loan, whether that's fifteen or thirty years or whatever it may be. And that's where you can really see the compounding savings. Sure, year one the monthly savings aren't quite as significant as what you might have with a temporary buy-down, but over the course of five, ten, fifteen years especially, the amount of money you're saving relative to a rate that was a percent higher — I mean, five hundred dollars a month over the course of ten years.

Dave (09:15): So what it sounds like you're saying is: if you're expecting to be in the house longer, it's likely to make more sense to buy the rate down permanently than do one of these 2-1 or 3-2-1 buy-downs. Is that a good summary? From the conventional financing world — and when I say conventional, I mean non-builder-financed loans — you typically see a quarter percent off of your rate costs one point, or one percent of the loan. So to buy the rate down a quarter percent on an eight-hundred-thousand-dollar house would cost eight thousand dollars. And to buy the rate down a full percent, which is usually the max, would be times four. So it would be thirty-two thousand dollars on an eight-hundred-thousand-dollar home to buy the rate down one full percent. And granted, builders can work out their own deals with their preferred lender — or in the really big national builders' case, they might actually be the same company, like the same corporation owns the mortgage wing and the building wing. Would you say that quarter-percent-per-point is in general what you've seen for permanent buy-down?

Nick (10:53): Yep. And the only real nuance I might add is that a lot of those numbers are based not on the purchase price of the home, but on the amount of the loan being taken.

Dave (11:10): Great clarification. So if somebody's putting fifty percent down, then on that eight-hundred-K home, it's all going to be based off of a four-hundred-thousand-dollar loan.

Nick (11:19): But yeah — if you're just doing rough back-of-the-envelope math, using that quarter percent per one percent of loan value buys the rate down a quarter percent. That's a good place to start for sure.

Dave (11:36): Okay, so we've got these two different options for buy-down. What are other ways? You talked about a lot of the time it's branded as flex cash — meaning you can use it for what you want. What other options are there?

Nick (11:47): "Flex cash" feels highly redundant, like — flex, flex.

Dave (12:06): Cash is already supposed to be the most flexible, as opposed to, I don't know, a gift card. Anyway.

Nick (12:07): So closing cost credits are another really big one. Because you could have origination fees, which are totally different from rate buy-downs, but those tend to be also roughly a percent of the loan value. You also have your title and escrow fees. There might be initial HOA fees. So there's some different prepaids and things — if you want to bring less cash to closing. You cannot use a builder incentive towards your down payment. This is a question we get a lot. Your down payment is a separate line item from your closing costs. The builder can't help you with the down payment, but pretty much everything else on that closing statement that's a cost to you, you could choose to use the builder incentive for — so that essentially all you have to bring to the table is your down payment.

Dave (13:22): So if you haven't gone through it in a while, or we're talking first-time home buyer — for anyone listening who might not understand all the mechanics of the purchase: they might know, "All right, I need to bring a minimum of three percent down." That's sort of across the board; you're probably not going to get any sort of loan product for less than that. And then they're looking at the numbers thinking, "If I can get just three percent of my purchase price, I'll be able to purchase this house." And then they get into the process and it's like, "Okay, wait, what are these other fees?" So in general, what are some of the fees, and what do those roughly total in terms of cost?

Nick (13:53): The biggest bucket is going to be fees related to your loan. If you're taking out a loan: the origination fees, appraisal fees, underwriting fees — there are going to be several items all related to getting a loan. And this is actually where shopping lenders becomes really important, because it's not just what interest rate the lender is charging you, but also what their fees are. And if there's any sort of rate buy-down, those points we were talking about are also considered a lender fee. We'll do another episode on that another time. That's something as well — whenever we're consulting with a buyer, we try to look at your specific situation and the lenders you're working with, so we have a really clear picture up front, because that's the greatest bucket of variables. But in general, one to one and a half percent of the loan value.

Dave (15:12): So let's stick with eight hundred so the math stays the same. If we're saying one percent on eight hundred thousand, that's eight grand — just on the loan side. So now all of a sudden, if you thought all you needed was your twenty-four-thousand-dollar down payment — surprise, you actually need another eight, probably at minimum.

Nick (15:42): Well, that would just be the loan side, right? Because then you still have your escrow and title fees, which you split with the seller, but in general that's going to come out to about a thousand, twelve hundred dollars. And then there's recording fees. So the rule of thumb — once again, back-of-the-envelope math — is one to one and a half percent for all the other costs for closing. So the title, the escrow, all those other things. So let's just call it a cool twelve grand, in addition.

Dave (16:16): So that's a fee that — if you were like, "I just need my three percent" — now all of a sudden, surprise. If you're trying to get a loan at that max loan-to-value, meaning you're only bringing three percent for your down payment, you need to come up with this twelve grand. And so it sounds like flex cash, builder incentive — they're saying, "Hey, we'll pay for that."

Nick (16:46): The builder says, "We can knock out the twelve grand so that all you have to worry about is your down payment; everything else is on us."

Dave (16:55): You already mentioned we can't use flex cash for the down payment. Maybe we should touch on that a little — people are listening thinking, "Well, I've got all this thirty thousand dollars to use, why can't it be used on our down payment?"

Nick (17:13): Yes. That has to do more with lending guidelines and preventing any sort of fraud or embezzlement — that's the main thing. And candidly, it's kind of outside the scope of where I can speak really intelligently. Because I know for most people they're like, "That would be really nice, I would love to bring zero dollars to the table." Unfortunately, there are also a lot of fraudsters in real estate who too would love to bring zero dollars to the table. Because essentially, every dollar that a buyer isn't bringing to the table is one dollar less that they are truly bought in, invested into the property — which means that risk has to fall to someone else. So even for a lender to do a ninety-seven percent loan-to-value ratio with the buyer only being in three percent, that's a ton of risk for the lender, which is generally why interest rates are higher when you bring less money down. The guidelines are more stringent. But it all has to do with lending guidelines.

Dave (18:26): So to state it as plainly as possible: a lot of these back-end rules that — if you don't live in the mortgage world — you're like, "What the heck?" It primarily has to do with protecting the lender. That's essentially what it comes down to. If you default on your loan and you don't pay, you lose your job, you decide you're moving and you're upside down on the property, that lender has to go through the process. And in a lot of cases, even if the loan is eighty percent of the value of the house, they still have to pay a real estate professional and all the fees associated with reselling the house. So even on a ninety percent loan-to-value — meaning the loan they wrote for the property was ninety percent of what the property value actually is — the bank is still going to lose money selling that property to a new owner.

Nick (19:23): So as you stated, it's their guidelines primarily to protect themselves. Exactly right. And so for really any buyer, no matter what builder — if they're offering an incentive: rate buy-down, whether temporary or permanent, and then closing cost. There are two more on this menu. These ones don't necessarily apply to every buyer. The next one is design center / design studio credits, or upgrade allowances. The reason these don't apply to every new construction buyer is that — as makes sense with a design studio — these are credits offered when you're actually part of the design process of the home. A lot of builders have pre-built inventory that's move-in ready, where all the design selections have already been made. Of course, they're not going to give you many upgrade options or allowances once the house is move-in ready. But if you found something prior to framing, or maybe you're buying the lot when it's just dirt and you're going through the entire process of building a home — this is where a lot of builders are very happy to say, "Hey, we'll give you the thirty-five grand to use towards design studio upgrades." Get better appliances, upgrade your hardwoods or your countertops, or whatever it is you want to do.

Nick (21:04): What are some of the advantages and disadvantages that you see to these design studio upgrade allowances?

Dave (21:10): Well, in general — would you say, in your experience in new construction, it's safe to say that the money you can use towards the design center, the offers towards property that isn't already built, is going to be significantly less than it is on already-built inventory? Is that safe to say? Or would you say you still see, if they're offering thirty grand incentive, you can use it on an empty lot saying, "I want this flooring, this countertop, so on and so forth"? I'm baiting the question a little bit, because the answer is nationally you're usually not going to get as much money on a home that you're going to design yourself as you are on pre-built or already-built inventory.

Nick (22:04): Yeah, exactly. It really does depend community to community, and especially on what the builder's own company goals are as far as what levers they're pulling and how much they're willing to give on what's called a pre-sale home versus a move-in-ready home. Of course, anytime a builder has a home that's complete, they're paying the carrying costs on that home every day until it sells, and so they're extra motivated to have completed homes sold. So yes, that tends to be where there's the most room for negotiation. But you can still get some great incentives on the pre-sale side. So to get back to your question: the design center — using your flex cash or any design center credit the builder is going to give — can be a great option if you're planning on staying in the house, you're having a longer-term mindset, and you really want maybe the infrared heater on the back porch —

Dave (23:25): Now we're talking.

Nick (23:27): Exactly. Maybe you want to upgrade to quartz countertops in the primary suite, something like that. The thing to note is: if you're using those dollars in that way, it really is a choice for your own comfort, your own enjoyment of the house. Because there are all sorts of studies on the value that is received from remodels and fix-and-flips for resale houses. In general, it depends on your market and the age of the house, but the common knowledge among real estate agents is that you're going to receive somewhere between fifty and seventy-five percent value back on your dollar. There's almost no upgrade to a house that gives a hundred percent dollar for dollar. This is more fix-and-flip territory, where they're looking at exact choices — different things cost different amounts of money. But it translates over to new construction in that if you spend twenty grand updating all the countertops and putting in the really nice flooring, it might help sell your house if you go and sell in ten years. Your house is going to show the best in the neighborhood — depending on what's around you, the width of the comps. But in general, if you're in a neighborhood with most of the larger national and regional builders, their finishes are going to be within a range. And so if you pick the higher end of those ranges, your house is going to sell better, but it might not necessarily sell for more. So that's the real caution: if you have this twenty grand and you're looking at this on a dollar-for-dollar perspective, most of the data indicates you're not going to get that money back dollar for dollar.

Dave (25:40): And there are several different ways we can go with this, because that design studio process is a real money-making center for home builders. Because when you're doing the pre-sale process, you start with a base price, but at least most builders here in Clark County are telling homeowners to budget five to ten percent for upgrades in the design studio. And so on that $800,000 home, that's $40,000 to $80,000 that on average most homeowners are adding in upgrades. And so you hear, "The builder's offering me a $35,000 incentive — that could knock out most all of the upgrades I'd want to do." And that genuinely can be great — if those are all upgrades you were going to do regardless, then essentially it's just like a price cut. It's still worth running the numbers on: would it be better to finance those design choices in and do a rate buy-down versus reducing the final purchase price of the home? That's really what the conversation comes down to, and some of the tools we're building to help people through this.

Nick (27:10): But just the design studio itself — I think the worst thing somebody could do with the builder incentive when it comes to the design studio is go in with the mindset of, "Yeah, we were probably going to spend forty thousand in upgrades, but because the builder gave us thirty-five grand, now we're spending seventy-five, eighty grand" — because the builder's knocking out half of it. And you start adding in a whole bunch of things that you don't really need.

Dave (27:47): To your point, you start adding in things that actually probably would make more sense to do after the home closes. Because not only do you not get a great return on most of the upgrades you make in the design studio process, those things are also generally marked up by the builder — because there's typically a contractor the builder is using, and then they might have a local rep, but the builder's got to get a percentage of that, the actual company they're contracting with has to get a percentage. You just see how this is a bunch of middlemen all taking a little piece of the pie.

Nick (28:33): Where it's like: if you can get away with what's included — and we can talk strategically about, hey, here are the actual things with electrical, structural changes, some of the things that would be really costly to remove and redo later, where you're going to get the highest ROI in those design center upgrades.

Dave (28:50): So I'm hearing two things to take from that point. The first one — and you didn't say this explicitly, but it was in there: if you walk into a model for a builder, you're usually not walking into that floor plan's base level. The models already have the upgrades in them. So you walk in and you're like, "This is pretty good." And a lot of the time you can go on their website and do the little 3D tour and they've got the floor plan, but it's just not the same as walking the house when it doesn't have those upgrades.

Nick (29:35): So if to get the house you really want you have to do all the updates, then it is a lot closer to dollar for dollar — but you need to go in with the assumption of, "Hey, this house that I think is eight hundred thousand dollars, even though it might be the same floor plan as the model, it's not the same house." And even if they seem like small things, if you tally them up over the total size of a house, it makes a significant difference in terms of the price.

Dave (30:06): So that's the first thing. And then the second thing you said that I think is a real big takeaway is: you and your agent — or you and whoever is advising you — understand the builder is there to make money. All of their upgrades are profit-generating for them. They're not giving it to you at cost out of the goodness of their heart.

Nick (30:30): So inasmuch as we understand that: what are the things you could probably shop for yourself? If you want a dimmer switch on a light, don't pay the builder to do it — you could find somebody to do it afterwards. What you can't find someone to do afterwards at the same price is anything that would require work behind covered drywall, or any structural changes. If you really want that third-car garage, you are not going to be able to just bolt it onto the side of your house at the same price. And in a lot of cases you wouldn't even be able to do it from a permitting standpoint, because of how they positioned the house on the lot. So it is hugely important to know what you're spending your money on in terms of the individual items offered in the design center. And that's where somebody who has experience in new construction can really help guide you, so you're not spending your money on things that are less than that fifty or sixty percent return on investment.

Nick (31:23): I had a really savvy buyer who just closed on an over-a-million-dollar home here in a community called Si Ellen Farms. He'd done a lot of custom builds before. And he ended up going with the included flooring and the countertop package rather than upgrade any of that in the design studio. And then just in the first couple of weeks of being in his new home, he hired contractors to come and pull out the countertops and whatnot. In some ways, does it feel kind of wasteful? Maybe. But based upon the markups the design studio was going to charge him, he did some shopping around and realized it's actually going to save me thousands and thousands of dollars to just have my own people come in and give me exactly what I want after the home is complete. Similarly with appliances — the builder might be willing to upgrade your appliances, but they are doing that at the maximum MSRP value. They're not shopping the Costco or Best Buy Black Friday sales to cut you any sort of break there.

Dave (32:54): Well, and this also goes into understanding the builders — what the different builders are, from national to larger regional to small local builders. Because if you're D.R. Horton or Lennar, special customizations are nothing but a drain on your bottom line. And in a lot of cases the bigger builders don't — they're doing enough numbers, they can move enough houses, and they have enough money in their budget that they can have these houses sit on their books a little bit longer, that they don't have to play ball with you on these upgrades you want. And then as you move into the smaller builders, there oftentimes tends to be more flexibility and ability to modify stuff.

Nick (33:45): But once again, you've got to keep in mind that the builder's making their most amount of money by building that house and closing it. That's when they get paid. So any of this sort of extracurricular upgrades and stuff slows their whole process down, which hurts from a dollar perspective. The time that house is on their books, in a lot of cases, costs them more. If it takes two extra weeks to coordinate all these upgrades, the carrying cost of that house for them is going to wash out any profit they might make on the actual labor of the upgrade. And that's why those prices are as high as they are, and oftentimes higher than what you could get at market rate.

Nick (34:45): Not to mention the extra risk it creates for them of doing something wrong. I remember with a Pacific Lifestyle home — they've got these packages of color schemes you can choose from. My buyers really wanted to just change the trim color on a couple of spots on the front elevation of the house, and Pacific Lifestyle was going to charge them like seven hundred bucks to make a very, very simple change. We asked, "Well, why is that?" And they were honest about it, which I appreciated — the candor of just saying, "Because we have painters, and they just look at the page that has this set color scheme, and we know they get going so fast that as soon as we call out 'hey, on this one house we're going to do the trim a little bit different,' they're probably going to miss it. We're probably going to have to call them back out. It's probably going to cost us twice as much and create frustration for everybody. So we put the seven-hundred-dollar charge in there as a hedge, so we're not losing when we've got to correct the mistake."

Nick (35:45): We've probably beat that point to death in an episode that's about builder incentives. Obviously there's so much to say on upgrades and all of that. But then the final option here in the menu — drum roll — any guess what it might be?

Dave (36:03): Just give them the money back. Just the flex cash — I would just like the cash off of the house. Like a purchase price reduction.

Nick (36:13): Yep. So if it's a thirty-five-thousand-dollar offer they're making to you, you can say, "Take that off of the eight hundred." And what does that put us at? Seven sixty-five?

Dave (36:22): Seven sixty-five, I think. Public math working for me.

Nick (36:30): I love it. Now, not every builder is willing to do this, which can drive some people nuts.

Dave (36:34): Why would a builder not want to just give you thirty-five grand off the purchase price? For the same reason they've done everything in the last three incentives — to protect their bottom line. How does it make a difference to them, though? If they're giving you thirty-five grand in closing cost credits or rate buy-down or design incentive, why is that — how does that protect them when it's still the same thirty-five grand, is it not?

Nick (37:09): It's a good question. And to answer it, you have to understand a little bit about how the market and appraisals and comps work. Essentially, the shortest way to say it is: the sale price of the home is a very important metric for the builder. So for example, maybe you're in a community that's in phase one of four phases and they're just getting started. You come in and it's a slow community — houses haven't really started taking off, people don't want to live in a construction zone — and so they offer this incentive. Well, if they take this $35,000 incentive off the sale price of the home, they're actually in a way shooting themselves in the foot for every similar spec'd home in terms of bed, bath, and square footage. They want to keep selling these houses in the future — that phase and the phases beyond — at the same price, or hopefully for them, higher. So if they want to get say $800,000 for this house, and they immediately discount that sale price and sell it at seven sixty-five, well now that's sort of their floor that they have to work up from.

Dave (38:39): And that can be really hard when a savvy buyer's agent comes and says, "Hey look, man, we see that this house you had listed, it didn't sell for the eight hundred you wanted it to sell for. It actually sold for seven sixty-five. That's what my client will pay for a similar spec home." And then the builder kind of has their hands up like, "Well, but the home is worth eight hundred, and we gave a discount."

Nick (39:23): So they're incentivized to make sure to give you that money in ways that don't face the public. As soon as the house sells, it gets recorded at the county and oftentimes in the local MLS, and it sets a benchmark that they have to negotiate against for all future sales.

Dave (39:51): And it creates real headaches too with appraisers, because the appraiser can't see if thirty-five grand was offered as a closing cost credit or in the design studio — but they can see if it shows up as seven sixty-five. And especially then, if a buyer's only bringing a minimal down payment or three percent down, that could disqualify them. If the appraisal comes back low on an eight-hundred-thousand-dollar base price home, it can create a real situation between the buyer and the builder.

Nick (40:28): So yeah, they really want to protect the value of the community. They don't want other people who closed on homes when maybe the incentive wasn't as sweet to be like, "Dude, what the heck?" It doesn't help neighborhood cohesion when you're in the house one house over that is the exact same floor plan, almost the exact same finishes, and you got it for thirty grand less.

Dave (41:01): And to a certain standpoint, if you're on the winning side of that situation, maybe you feel a little smug about yourself — but do you really want your neighbor to be upset at you that you got your house thirty grand cheaper? That doesn't feel good for anyone. That's a bit of an anecdotal point here, but primarily for the builder it is protecting their bottom line. It's so they don't have to negotiate against themselves, and so the appraisals don't come in in a way that could hurt the lending for the people trying to buy.

Nick (41:33): Okay, so that hits our five options. I think we had started this whole section too of, "Well, builders aren't just offering these things out of the goodness of their heart." So do you want to get into how the economics of this works — how is the builder able to offer these kinds of incentives?

Dave (41:56): It'd be good to touch on that a little bit. There are a couple things working. It's the economy of scale — you see that reflected in that the larger national builders are able to offer better incentives. Consistently the dollar values are higher, and they get offered more often when you're talking Lennar, D.R. Horton. And not that the local regional builders like New Tradition Homes or Pacific Lifestyle don't, but the national builders — Lennar, D.R., Taylor Morrison, the other ones — a lot of times are part of the same company that owns the mortgage lending wing, which they call their preferred lender. Now, a regional builder might also have a preferred lender, but it's probably a totally separate entity that doesn't have a shared parent company. So the deal you can get from a regional builder is oftentimes not as good as you're going to get from a larger national builder. So you have economy of scale — the D.R.s of the world are able to buy huge swaths of land.

Nick (43:31): To cut through and give the short answer, so you can follow all the way through: they price it into the sale of the home. That's essentially it. They buy the lot, they plan a type of house on it, and they know what their margin is. And they say to themselves, "Well, if demand is high enough and we can just get this — like there's a frenzy — then it's just more money in our pocket. But if we price the house high initially, it gives us a couple levers to pull to try to get more interest in the house if it's been sitting for a little while." So that's the short answer. The more complicated answer is that on the financing side, for preferred lenders, they're able to buy credit at a cheaper rate — and that gets into what's called a forward commitment — and they're able to offer lower rates. But the short answer is economy of scale. It's built into their margin. They price their homes so that they're going to make a profit selling the home, but there is cushion in their number, because there's an expectation that maybe the house isn't going to sell immediately. And if we start with the initial price high, we have some levers to pull to try to gain more interest, to try to incentivize buyers to come through the door. And a lot of the time it's a competitive landscape, especially here in Clark County where there are a lot of builders, so it really depends on how many houses are on the books, if they've had a bad quarter and they need to get rid of something. But that's the short answer.

Dave (45:10): Yeah, that's good. And so you can negotiate further beyond just the advertised credit — that would be another sort of takeaway for buyers. Don't give up any ground, and know that it's not free money. So then, out of the options we've gone through of the different types of credits, what would you say in your experience is the best choice? I mean, we've got thirty-five grand on the table still and you want to know how to use it. If I'm giving you thirty-five K in flex cash, how are you going to flex it?

Nick (46:00): Back to even the last episode, right — where it's like, "Well, it depends." There's a running theme there. We like to tailor it to your unique situation. Because here's the thing: the temporary buy-down I generally steer people away from. I don't like what it means for your monthly payment going up significantly year over year until you hit the market rate. It feels like savings for year one. Every year after that, it just feels like your house payment is going up. And we all have these idealistic visions of, "Well, it's just a tight year right now, but next year I'm going to get a raise, and I'll cut this back and cut that back." But the reality is, for most people, they're not disciplined enough to either save that money — or lifestyle just sort of has this tendency to creep and expand to fill whatever extra margin we have. And so while it feels like savings initially, for most people I find that by year two they regret it. Now, if you're only planning on being in the home for three or four years — we might want to have another conversation about whether it actually makes sense for you to be buying a home, or this home, right now. But let's just say that is your circumstance, you're only going to be in it for a few years. Well, then maybe a temporary buy-down — that could be the limited sense in which it makes sense. Or if you have a crystal ball and you know that rates are going to come down by two or three percent in the next couple of years, or you're willing to take that risk, then a temporary buy-down could be great, because you get a huge discount for a couple of years and then by the end of that buy-down period you refinance to the lower rate and all is gravy.

Dave (47:57): That again is kind of like playing the stock market.

Nick (47:58): It kind of is. So I generally discourage people from going the temporary buy-down route. Now, on the permanent buy-down route, there is real savings compared to the market rate today. The problem is: how many people actually stick with their original loan and rate — especially when rates are at 6.7 percent? Again, I don't have the crystal ball, but I'd say there's a reasonable likelihood that at some point in the next decade rates will probably drop below five percent again, at least for some short period of time. Because rates are cyclical, the economy is cyclical. And so the question is: okay, if you drop thirty-five grand of your builder incentive to buy down your interest rate by one percent, what happens if rates drop in the next three years to even lower than what your current rate is with the buy-down? A, you're going to feel like "I should refinance and take advantage of the lower rate." But then B, you haven't been in the current bought-down permanent rate long enough to actually realize the full $35,000 of value. So you're actually leaving money on the table that way.

Nick (49:23): However — this was again the gamble that a lot of buyers took in 2022, 2023 as rates started to go up. They felt like, "Well, I'll just stick with the market rate, I'll use the builder credit towards other things like off of the purchase price or design upgrades, and then I'll just refi in a couple of years." Well, a couple of years have come and went and rates have stayed the same, if not gone up even higher. And so if you really just want the stability of, "Hey, month-to-month cash flow is the thing that's most important to me, and I know that by doing a permanent rate buy-down I'm going to be saving three, four, five hundred dollars a month for however long I keep this loan, and that's what makes this home comfortably affordable for me" — then that's great.

Dave (50:19): With the design studio upgrades, I think you made the point extremely well — if you're going to be in the home a long, long time and you're just trying to build your dream home, that might be a fine way to do it. Especially if you're financing and you're concerned about appraisal issues. This can be an area where somebody'll drop a hundred grand into their base-price eight-hundred-thousand-dollar home and then they start to run into real issues of, "Well, why is your home a hundred thousand dollars more when these upgrades only add sixty percent in value?" That's where being able to take thirty, thirty-five grand off of those upgrades keeps you out of trouble from an appraisal standpoint. And then if it's purely just an equity play for you, or you're a cash buyer, then the purchase price. I guess the one that I missed is the closing costs.

Nick (51:19): Right, we touched on it just a little bit. If you're cash-strapped and you just want to keep more savings — which frankly I think is always a good idea, especially when you're buying a home. You just never know what surprises life is going to bring. And it seems like even if you're buying a brand-new construction home, you get the keys and then the next thing you know you've got major car troubles.

Dave (51:45): That is how life seems to go, isn't it?

Nick (51:51): You can never have all the good things all at once. So being able to keep extra cash on hand and use those builder credits to knock out your closing costs can be a really good way to go too.

Dave (52:06): And we blew past it a little bit, but once again this goes back to just making sure whoever you're working with understands the differences in these incentives. There are actually caps on what you're allowed to use based off of what your loan is. If you have a high-risk loan — like above ninety-five percent LTV, meaning you only put three percent down — your lender is actually going to cap how much contribution the builder can put towards your rate buy-down or your closing costs.

Nick (52:48): Right. And that all goes back to the lender wanting you to have a stake in your house and lowering the likelihood that you're going to default on your loan. And so if you say, "Yeah, the builder says I've got thirty-five thousand dollars," you have to know how to structure that incentive — that you might only be able to use eighteen to twenty thousand to actually buy down the rate and apply towards closing costs. And then if there's any extra, you have to convince the builder to use that towards design upgrades. So these deals can get a little complicated, and that's why the answer truly is: it depends on your individual situation.

Dave (53:19): And I'm really glad you bring that up, because the way that podcasts work — trying to distill a whole lot of information all at once — it makes it sound like these are all binary, you can use it for this or that. But the reality is it's often both-and. Like some combination of, "Hey, I'll use ten thousand towards interest rate buy-down, I'll use another ten thousand towards the closing cost, and then I'll use the remaining fifteen towards upgrades," or whatever that actual breakdown looks like. Usually that money gets split a bunch of different ways.

Nick (54:09): But the one thing you don't want to get caught with is, in the contract, specifying "yep, I'm going to use all of it for closing costs" — and then you find out that your lender has capped it, or that you can't use all of that money towards closing costs. Because guess where any of the proceeds that you can't use end up going?

Dave (54:30): Back to the builder.

Nick (54:34): Back to the builder. And this is where having representation on these kinds of deals — somebody that's able to look out for you, make sure the contract language is structured such that you're able to take full advantage of every single dollar the builder is offering you and leverage that to your maximum benefit — that's where we really feel like we prove the value that we offer in representation.

Dave (55:00): It's also important, just on that note — if you know you're going to work with an agent for a new construction project, a lot of builders want the agent to actually register with the builder. Meaning if you show up to a community and you sit down with the sales rep at the design center — most builders aren't going to say this, but every now and again they'll say, "You don't need an agent, don't worry about it." And what they're trying to do is get out of paying the buyer's agent's commission. They're trying to essentially put that money back into their own pocket.

Nick (55:45): Our recommendation is that you should have representation buying a new construction home — or at the very least, be confident in this information and understand how different offers can be structured, and realize that the sales rep sitting in the model is not your friend. They work for the builder. They do not have your best interest in mind, necessarily. Now, does that mean they're nefarious? No. But you also can't expect them to negotiate against the person who's signing their paycheck. So keep in mind, a lot of builders want your agent to register when you get there.

Dave (56:21): And is that something bigger nationally, or do a lot of the regional builders still want to see that?

Nick (56:35): They all do. I mean, of course, every builder's trying to keep every dollar they can to themselves. And so the nice thing is, given my background, I've got relationships with pretty much all the builders. So if you've been into a model home and you're like, "Crap, I didn't have an agent, I didn't specify someone" — at least with the local builders, most of them are pretty understanding, especially if it's somebody they have a relationship with. So there may be ways around it; you're not necessarily screwed. If you do walk into a model home, even if you haven't retained us or chosen an agent, I would just say, "Hey, I'm working with Nick and Dave at The Tartan Team" — or whoever it is — just because you can always opt out of it later, but better to cover yourself up front.

Nick (57:24): One last thing I'll say on this point, just so you can have it in your head. Most builders in Clark County are offering around 2.5% to a buyer agent for compensation. Because Dave and I — Tartan Team — charge on a flat fee model, depending on the tier of service, there's often a difference between what the builder is willing to pay a buyer agent and what we actually charge. Usually the builder's willing to pay more than what our fee is. Two and a half would be over $24,000 on an $800,000 house, to keep our example going. So the difference there between our fee and what the builder's offering goes back to you. And that actually factors in even more to, "All right, how do you want to leverage this?" But that can be just another sort of — not only do you get the benefit of having representation, but then you're able to maximize some of those dollars that most builders aren't just going to give you. The two and a half percent that they would give to an agent — this is a nice way of getting around that, while also getting real value of having somebody looking out for you throughout the process.

Dave (58:36): Good, super cool stuff. Hopefully, if nothing else, you found that informative — if you're considering new construction on your own, or maybe you're not in new construction and you're just like, "Well, what are all these incentives they're talking about? How could it really be that good, thirty-five thousand dollars off?" That's a little overview. But again, if you have questions, you can always book a call with us.

Nick (58:54): We've got a calculator on the site that we'll link to in the show notes that just helps — so if you've got a specific scenario you want to run and see the numbers yourself. But these things are always worked out best in conversation, so do take us up on that. Subscribe to the show. Share it with somebody who you think would be helped by the content here. Leave us a review too — that just helps with getting more listeners. All right. Clearly I have said enough words, so we should probably call it here. We'll see y'all in the next one. Thanks for listening.