The housing downturn means you have to be creative and smart with your financing options. A big obstacle right now is the contingency objection. Jim Deitch, co-founder, chairman and CEO of American Home Bank, breaks it down for you and discusses several options to overcoming this issue.
1. What is a contingency objection?
A contingency objection usually takes this form: Your potential customer has a home to sell, so he'll buy your new home contingent upon the sale of his old home. This means you don't have a sale of your new home and may not want to tie up your spec or begin new construction while waiting for his home to sell.
2. What are some banking solutions builders can use to combat this objection?
See if the customer can qualify carrying two mortgages. Sometimes a lender can qualify the customer as capable of making both payments, but the underwriter has a standard condition of must-sell old home.
If the lender won't qualify the customer with both payments, then you as the builder might consider making the purchase of your home attractive by providing an interest subsidy to your customer. On a 30-year loan, a two percent subsidy in year one can reduce the monthly payment for a $150,000 mortgage from approximately $998 to $805. This saves your customer about $2,316 the first year.
Most importantly, the subsidy may reduce the income necessary to qualify for the loan by almost 10 percent. Subsidies offer more "bang for the buck" than almost any other incentive, and they help your customer qualify at a lower interest rate.
Suggest that the customer explore guaranteed sales programs with real-estate agents. You might have to help the customer with the guarantee fee, but this fee could mean a sale for you. Then suggest the customer take the guaranteed sale contract to the lender and have the lender remove the stipulation of the home to sell.
Offer first-time home buyers the buy-out of an apartment lease provided your customer signs your contract and gets a binding mortgage commitment letter from a lender.
Consider making the payments on the old home until it is sold or the guaranteed sale kicks in. Because you're making interest payments on your spec house anyway, get it sold and help the customer at the same time. Document your willingness to make the payments on the old home in a letter to your lender, and the home-to-sell contingency may disappear.
4. How should a real-estate agent use these tools?
The agent has to determine whether the potential customer can't or won't buy now. "Can't buy now" means the lender won't lend the customer the money because of the home to sell. "Won't buy now" means the customer is uncomfortable buying now, even though he is qualified to do so.
Today's potential customers know that they are in a great position, so the agent should ask, "If I could arrange for the builder to guarantee the sale of your old home, can we go forward?" or, "If the builder would pay some of your interest for the next year, will you consider buying now?" or "If the lender would qualify you with both payments, can we make a non-contingent offer?"
5. What is the most common mistake salespeople make when they come across this objection?
They take the contingency objection at face value. Salespeople first have to determine whether the customer can't buy or won't buy. Many salespeople don't explore how to help buyers who can't buy because of mortgage qualification issues with an unsold old home. The builder and sales team need to develop a predefined plan of action with their preferred lender to capture the sale.