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Thursday, June 7, 2007 | In a strategy borrowed from the playbook of car dealers, some homebuilders are offering would-be buyers a way around the uncertainty of selling in a slow market.
They’ve taken out newspaper ads and posted large signs to push the tactic: If the builder’s realty team can’t sell a customer’s home in a certain amount of time, it will buy it so the customer can be free to purchase one of its new homes.
A Twist on the Old Switcheroo
“It’s not horribly complicated,” said Mark Connal, real estate broker for Michael Crews Development. “We buy your house; you buy our house.”
Salespeople say the trade-in program, an approach that flexes and wanes with the turns of the market, allows them to reach a section of the market facing a behemoth barrier in current market conditions — the sale of their old home.
“I think that it’s a sign of the times — this is not the first time we’ve seen it,” said Tim Sullivan, president of the Sullivan Group Real Estate Advisors.
Detached homes sold in April had spent, on average, 71 days on the market before they closed escrow, according to statistics from the San Diego Association of Realtors. That’s up from 62 days in April 2006, 50 in April 2005, and 29 in April 2004, the Realtors group said.
“In today’s market, it’s the biggest obstacle: How am I going to get rid of my old house?” said David Bennett, sales representative at Crews’ Cityscape, a group of 14 row homes in Escondido.
A few of the region’s developers, including Michael Crews Development and Barratt American, currently offer the eye-catching program. A large number of the subdivisions featuring the program are luxury, high-end homes, but there are a few that are more suited for move-up, mid-level buyers.
“I think that, used in a particular fashion, used in a selective fashion, it makes a lot of sense,” Sullivan said. “On the high end, it makes sense — if [builders] want to move a higher end home and [they are] taking on a lower end home, it might be a little easier to sell.”
The trade-in program allows builders to offer buyers a concession (they’d call it a “value-added program”) on the purchase of a new home, without frustrating the neighbors, many of whom purchased similar homes when the market was hotter. If the home next door suddenly sold for substantially less than was paid for comparable homes, builders could face a line of disgruntled homeowners in short order.
“This is more done to protect homeowner’s values than anything else,” said Jeff Pitzer, sales director for Barratt American. “Some builders … do price-slashing, and we don’t do that.”
While the campaign may work to generate interest and inspire hope in the minds of beleaguered unsuccessful sellers, it doesn’t apply to every situation. And some skeptics caution participants that the convenience comes at a cost.
“We’re not going to overpay you for your home,” Connal said. “But if we don’t give you enough, it’ll never work either.”
The program at Michael Crews Development functions using three scenarios. A client agrees to purchase one of its new homes, has the old home appraised, and the developer’s real estate arm lists the home on the market. If it sells within 60 days, the sale functions as a normal sale and the commissions charged are 7 percent — a 1 percent fee added to the typical 6 percent commission split between the buyer’s and seller’s agents.
If a buyer is found but the transaction can’t be closed within 60 days, the developer loans the clients what they would carry forward from their old house, which they pay back once the transaction closes. Third, if no buyer is found within 60 days, the developer purchases the home for the appraised value less about 12 percent — the 7 percent commission plus a 5 percent holding and fix-up costs fee, including the cost incurred in holding on to the home and conducting the transaction whenever the buyer comes along.
Of the people who express some interest in the trade-in program, it ends up working for only about one-third, Bennett estimates. One common reason is that the buyers don’t find a home in the developments that they want to buy. Another is that the home they’re hoping to trade in is too much of a risk for the builder to take on.
Michael Crews Development offers at least one home for the program in several of its developments in Escondido, Vista and the State Route 78 corridor. At Cityscape, a row home development in Escondido, one of the units is available for the program. The 14 two-story row homes are about 2,000 square feet and half have sold. They’re currently selling for about $460,000.
Barratt American offers a similar program on some homes at its subdivisions in Carlsbad, La Mesa and Encinitas, among other spots in Southern California, and has used the program to close hundreds of sales. In that program, Barratt’s real estate team examines the customer’s old home and makes an offer based on what they see; the company itself, then, owns the property and tries to sell it later.
“We don’t buy properties that are falling down,” Pitzer said. “It has to be about 80 percent of the value of our (new) home.”
Barratt American’s Magnolia Estates is at the opposite end of the spectrum from Cityscape. Billed as luxury estates, the project starts at $1.8 million for the 5,000- to 6,200-square-foot homes with four-car garages in Carlsbad’s Bressi Ranch.
Of the 25 homes in the project, 17 have sold, Pitzer said. He called the program a sales technique for projects such as Magnolia that have standing inventory — the company expected sales to move “a little bit faster” on that project than they have in the two years the homes have been selling, he said.
Similar to the car trade-in model, the customers likely get less money for their old asset than they would if they sold it themselves.
“It’s more expensive (for buyers) to do it this way,” Bennett said. “We’re saying, ‘How do we make this as fair as possible?’”
That “as possible” phrase is the cautionary note issued by skeptics of the program — and of car trade-in programs, for that matter. When consumers seek convenience, they almost always will pay for it somewhere.
For Frank Mangano, the program offered by Michael Crews worked incredibly well. He and his wife, Tammy, “fell in love” with a home in Michael Crews’ Potter’s Creek subdivision in Fallbrook last year when they hadn’t even thought yet about selling their home in Menifee.
Mangano said he asked the salesman if the developer took contingencies — an offer on a new home with the stipulation that the old home has to sell first. That was against company policy, but the salesman then told him about the trade-in program. Mangano heard what Michael Crews would offer him for his 3-bedroom single-story, then brought in his own Realtors to give an estimate of what he could sell for.
Michael Crews’ offer of $475,000 turned out to be higher than what Mangano’s experts estimated. He signed up for the program and used the equity from his Menifee house toward the purchase of a $930,000 three-bedroom home in the Fallbrook development. He and Tammy have lived in their new home, which is 1,500 square feet bigger than their old one, for about two years.
He said he didn’t tell the developer until after completing the swap that he feels he lucked out.
“I figured they’d be low-balling it,” he said. “But it was a lot better for me. It was better than using a real estate agent, because you don’t have to wait for the house to sell.”
Of course, Mangano’s situation is unusual. North County Realtor Jim Klinge said sellers in this market are notoriously averse to lowering their price for any reason. Downward pressure on prices in the market competes in sellers’ minds with what they remember their neighbor or pesky cousin selling their houses for during the heated market of a few days ago.
But now, with homes taking longer to sell and buyers having more homes to choose from, the guarantee from programs like these is hard to pass up.
“The most inconvenient part is trying to time the sale of your old house to coincide with buying a new house,” Klinge said. “They’re selling convenience, and God bless ’em. But they’re not going to give you your sky-high dream price on your old home and cut you a deal on your new one. There’s no free lunch.”