Builder incentives: Just marketing, or the real deal?

Most new-home buyers find it hard to resist the lure of builder incentives -- paid closing costs, an allowance for free upgrades at the design center or interest-rate buy-downs. But are they really worth it?
From the builder's perspective, such incentives help sell homes faster, avoid price cuts, introduce available upgrades and expedite the sales process by encouraging buyers to use affiliated mortgage, title and escrow companies.
However, as with all financial transactions, incentives should be considered with caveat emptor (buyer beware) in mind. Some generous-looking packages, on close inspection, may not be so generous, with higher closing costs and steeper interest rates contained in cumbersome mortgage documents. What's more, buyers may end up paying property taxes on a sale amount that includes not just upgrades to the home itself but also financial goodies such as pre-paid homeowners association fees or up-front closing costs.

For Tustin resident Glen Biener, a background in real estate and financial planning helped him get the sales incentives offered and nab competitively priced mortgages from builders William Lyon Homes and the Lennar Corp.

Last year, Biener closed on a new town home priced close to $650,000 at Lyon's Clarendon at Columbus Grove in the Tustin Legacy master-planned community. He said that he liked the $20,000 Lyon was offering for his choice of upgrades or closing costs but that he didn't think much of the financing initially offered by the builder's in-house mortgage arm.

Room for negotiation

"When I got the rate and their fee schedule, it was greater than what I was quoted by an outside broker, so I went back to Lyon," Biener said. "Their loan guy reduced the fees and the rate." Biener believes he got the reductions only because he knew what to ask for, and he said that the higher mortgage costs quickly would have eaten up any savings from incentives. William Lyon Homes did not return repeated calls for comment.

Biener also said he discovered the builder's design center didn't offer competitive prices. For instance, he said he found an outside tile retailer charging 40% less. So he opted for a flooring credit, and once he closed escrow, he replaced the standard carpeting with the tile of his choice. Although happy with his home purchase, Biener said his experience led him to conclude that a simple discount off the price of the home would have been far easier than dealing with incentives.