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November 9, 2023

Rate Buydowns Can Help Move The Condo Market

939 Jackson 304

A temporary interest rate buydown is a great way to help sell some of the more than 700 condos sitting on the market.

What’s this about? I covered rate buydowns a year ago, and I still think they’re a good negotiating tool for properties that have been sitting on the market. The buydown can reduce the buyer’s monthly payment for the first year or two of home ownership.

How can sellers motivate buyers to take action? One option for sellers is to offer what’s called a 2/1 buydown to temporarily get the rate down to the 5% – 6% level for the first couple years of the buyer’s ownership. (Rates for a 30-year fixed mortgage were 7.85% as of November 7th.) The seller agrees to pay the cost of the rate buydown by two percent the first year and one percent the second year. This non-recurring closing cost is paid in escrow out of the seller’s proceeds from the sale.

What price point is ideal for the buydown? Condos in the lower to mid-range price point are good candidates for this strategy. There are currently 400+ condos listed for up to $1.2M in San Francisco, with an average days on market of 77.

How would this work? Let’s say you have a condo listed for $1.2M and a buyer comes in at asking with 20% down. The interest rate on a $960,000 loan would be 7.85% with a $6,944 monthly payment. The buydown would drop that payment to $5,644 (at what’s effectively a 5.85% rate) for the first year, saving the buyer $1,280/month. The savings during the second year would be $654 per month. The cost to the seller in this scenario would be approximately $23,000. (Costs vary depending on loan amount and interest rate).

Give this one a try:  I love 939 Jackson #301 in Nob Hill is a top-floor, 2BR/2BA condo with in-unit laundry and parking, listed for $1,198,000. The sellers paid $1.3M in 2020 and initially came on the market this past August for $1,275,000. (The cable car runs past the building, so you have to be okay with the noise and vibration.) Otherwise, this is a solid property with everything buyers are looking for. Something tells me Jackson would be a good candidate for a seller interest rate buydown. (Photo courtesy Vanguard Properties]

The upshot: The rate buydown is a great tool to get closer to the price you want while giving the buyer some mortgage relief. There’s also the possibility that rates could be lower after those initial two years, at which time the buyer could refinance to avoid the jump in monthly payments in the third year and beyond.

[Thanks to my friends at Guarantee Rate for the information provided for this post.]

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