It feels impossible to buy AND sell. Here are some real estate strategies to help combat rising interest rates.
Interest rates are averaging 7%.
Yet buyers can only afford the same payments they could when interest rates were 4%.
This reality of affordability puts buyers and sellers both in a tough spot – buyers can’t qualify for the price point they’d like to, and sellers can’t get rid of the flips they bought earlier this year.
What can you do to combat rising interest rates like this?
How a Buydown Impacts Your Listing Price
You end up with two main strategies to combat rising interest rates in this market:
- You can lower your price to make the monthly payment the same for the buyer, based on interest rates.
- You can buy down the rate for your buyer.
A buydown is a strategy where the seller pays in advance to bring down the interest rate for the buyer.
In our previous example of the $800,000 property, our target payment would be $3,800/month. What would the purchase price be if we took the 7% interest rate down by a percentage point? Could that get us closer to $3,800 without sacrificing as much purchase price?
Let’s say it would cost 2 points to bring the interest rate down to 6%. That interest rate would allow you to sell at $640,000, while still keeping the buyers’ monthly payment at $3,800/month.
Buying down the interest at a cost of 2 points would only cost you $12,800. Yet even with that buydown cost, you’d still make an additional $52,200 selling at $640,000 (compared to the $575,000 pre-buydown).
It becomes a win-win: the buyer can qualify for the $3,800/month payment, and the seller can ask for a higher price.
How to Price a Flip to Combat Rising Interest Rates
This example covered a higher-end, $800,000 house. Does all this math work the same at a lower price point?
Let’s look at a $250,000 instead.
At the beginning of 2022, a $250,000 house would have cost a homeowner $1,193/month. Now, that same house would cost the same person $1,663. That’s $470 more per month, or a 39% increase. From early 2022 to early 2023, the monthly payments will have gone up by 54%, to $1,834/month.
These numbers are still probably cheaper than rent for a comparable property. However, that doesn’t necessarily mean buyers will be able to qualify with lenders.
If someone could buy a $250,000 house at the beginning of 2022, now the same exact person could only afford $180,000. By next year, they can only afford $162,000.
This is why properties are sitting on the market. When prospective homeowners buy by payment, they can only afford 30-40% less in purchase price.
Buydown at $250,000
What if you try the buydown technique here?
If you paid 2 points, you could bring the interest rate down to 6%. This would cost you $4,000, but allow you to sell for $200,000. You’d net $16,000 more than if you were to sell at $180,000.
Sometimes, it’s not about price for the buyer. Many homebuyers are payment-motivated shoppers. Instead of lowering the price, try getting your buyer’s payment in line.
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