Would Outside Incentives Help The Purchase Market?

Some realty firms and builders have stepped up efforts with offers of an incentive, often worth thousands of dollars, to buyers upon closing. The trend seems to be leaning toward the incentive being something not specific to the property.

Offering or giving an incentive to a buyer is nothing new. In the past, it might be new furniture, a big screen TV, or some sort of a services discount or gift (i.e. free maid service for 3 months).

One big difference with incentives now is that many more are offered to buyers, whereas in the past it was often incentives to realty agents who brought the successful buyer. Even though it was about 20 years ago, I still remember a time I was doing a marketing presentation at a realty association meeting in the Los Angeles area. While waiting, several agents were pitching new listings they had to the other agents in order to draw attention in a then hot market.

The owner of a realty office with about 12 agents got up, pitched one of his listings, and then promised "an additional $5,000 in commission on a sale from any of you who get me an offer by 5:00 PM today". Now that was "creative selling" at its best!

Of course, at that time, his purpose was to attract attention to his listing and make other agents remember it ahead of hundreds currently available within the same area. And attract attention he did. Yet, the eventual buyer of that home had no clue. The "incentive" was used effectively where it needed to be.

Recently, I have seen sellers, realty companies, and builders offering some interesting incentives to the actual buyer. These range from a pick-up truck to installing hardwood floors. Some are specific to the property, others are geared toward the buyers.

A realty company in Birmingham AL offered a 4-year tuition to the University of Alabama Birmingham Medical School (over $22,000) with the purchase of a unit in an upscale development. The Birmingham News reported there were no takers. (On a separate note, that incentive was stopped. That was dumb to stop it. They should have continued it since not many other incentives are valued at more than $20,000, and if they got a "taker" the local and national publicity it would have generated would be worth far more than the amounts paid out!)

I also saw a news story about a seller who allowed the asking price to be reduced by $2,500 per week for several weeks.

In an active real estate market, such methods make sense when the idea is to make "your" property stand out. Agents and builders want buyers to consider their property ahead of others they are looking at. Of course, this assumes there are plenty of active buyers out there.

That's the difference. Right now, thousands of dollars worth of incentives don't matter nearly as much when people who want to buy can't get a mortgage and/or can't sell their current property to guarantee a move. Unless they are the right incentives.

For many, the "right" incentive would be a buyer for their current property so that it can lead to the next sale, or being able to get better financing for a first-time buyer.

Somehow, there has to be a way for "regular" sellers to compete against the foreclosures and short sales. But first, we need for buyers to compete. Period. The fact that there continues to be so many foreclosures and short sales on the market tells me that there people are not buying, even at lower prices.

Until people and investors can start buying a serious number of properties, a big screen TV or a pick-up truck won't make a difference.

Take The Long Way Home.......

While some people within the real estate industry are pleased about the tax credit extension, I am still not sure this was really the best way to go in terms of the impact on the economy. Or the market.

First, the deadline factor has been blown forever. The government stepped in to the auto industry with the “cash for clunkers” program and it was considered a success. That deadline came and went. Those that procrastinated and then held off clearly lost an opportunity. The $8,000 first-time buyer tax credit was a government move designed to get more consumers into home ownership. But in this case, the deadline has already been extended. So much for sellers and realty agents putting pressure on potential buyers now. A potential buyer can take his/her sweet time about it now, and there is no rush for those who were going to try for a “last minute” bargain.

This “extension” seems to have been pushed through as a result of pressure instead of on market impact. I was looking at some statistics about home sales for 2009. Because of this “extension” already being in place, we are not likely to see any sort of spurt in first-time buyer sales for the remainder of November. (That is one bad side effect right there!) In keeping with the home sale statistics thus far, it will very likely mean that less than 40% of home sales for the first 11 months of this year will have involved the tax credit. In other words, the majority, to the tune of over 60%, of home sales this year will have had nothing to do with the tax credit. While the result of this program has indeed sparked some first-time buyers, this has hardly been at a dominating pace.

While this thought is not a statistic, my hunch is that consumers saw that the car “cash for clunkers” deadline was NOT extended and this motivated them to proceed as first-time home buyers. Therefore, I do not foresee a significant increase in activity now that the deadline has been extended. Once we get into first quarter of 2010, the $8,000 tax credit wouldn’t go “in pocket” of the participants until 2011. Not that it won’t help, but hardly an immediate boom to the economy.

It is true that this extension also offers benefits to existing home owners, based on income and length of time owning the current home. However, this part of the tax advantage does not necessarily spur additional home sales.

From a marketing standpoint, I have another concern. Thousands of realty agents and brokers have been promoting this tax credit to potential first-time buyers (or should have been!), hoping to use the “act now!” approach because of the November 30, 2009 deadline. So what do they do now?

They can’t put any urgency into the same program, when it was already extended before the originally scheduled deadline. If home prices continue to drop in many areas, these potential first-time buyers will have benefitted by waiting! They would get a lower price for the “same” home, and then the tax credit to boot, compared with if they had listened to the agent in recent weeks. If home prices rise instead, then the tax credit does not make the same home any more affordable at the time of possible purchase. It would still be a matter of homes not being affordable. This could come off as another marketing blunder by real estate agents and brokers.

Why do I blame them? Because I also saw the information that Realtors reportedly spent, get this, more than $12,000,000 lobbying for extension of this tax credit. That’s right. Over $12 million dollars. Money that could have been spent advertising and marketing properties available for first-time buyers. For that matter, also for long time home owners looking to move on up or downsize. Or, money that didn’t have to be spent. Maybe this is where the real tax breaks are going!