Glen Creno
The Arizona Republic
May. 23, 2007 12:00 AM
Having trouble selling your house so you can buy that new dream home? No worries.
Some builders will let you trade in the old place as part of the deal for a new one.
Builders frustrated by customers canceling deals are coming up with aggressive ways to keep them. Some are offering trade-in programs. Others are giving sales guarantees on existing homes. It’s a switch from their traditional role in the house deal: building and then selling them. Now, builders are taking a more active role in clearing the way for buyers to purchase their homes.
The new programs are driven by a drop in new-home orders and soaring cancellation rates that have left many builders with an excess of unsold homes.
Cancellations shot from 1 percent in January 2005, the midst of the housing boom, to nearly 29 percent in March, according to Hanley Wood Market Intelligence, a real estate and new-home construction consulting firm in Costa Mesa, Calif.
Although some companies are seeing an improvement over last year, cancellations were still running high the first quarter of 2007.
At Scottsdale-based Meritage Homes, cancellations stood at 28 percent. At KB Home, it was 31 percent. Pulte Homes lost 25 percent of the sales to cancellations in its Southwest division, which includes Arizona.
Valley housing analyst RL Brown said a 15 percent rate is an acceptable industry standard, assuming that sales agents who are aggressively pursuing contracts are bound to see some deals fall through.
Customers cancel orders for various reasons. First-time buyers may have lost out on a loan, investors may have walked away because the big appreciation gains are gone, and move-up buyers may not have gotten what they wanted from the resale of their home. Builders have little control over the first two, but they can work to free up buyers in existing homes.
“The resale market is slow right now,” said Dan Tartabini, sales director at KB Home. “We want to make sure people who buy from us that have a house to sell get to the finish line.”90% of appraisal The trade-in program has been working for upper-end builder T.W. Lewis of Tempe.
The company buys select resale houses from buyers of its built but unsold homes. The resale must appraise below $500,000. The company will consider paying 90 percent of that price. Lewis had done three such deals and had five or six in the works as of mid-April, said Kevin Egan, the company’s president and chief operations officer.
People can continue to list their resale homes until the new one closes. But that’s typically about 60 days because spec homes are completed, or nearly so. Single-family Valley resales sold in an average of 91 days in April.
Egan said the trade program appeals to buyers who don’t want to get stuck paying two mortgages when their resale doesn’t sell.
“They want to buy our home. They want to live in our home, but they have the burden of selling their home,” he said. “This alleviates their fears and lets them go forward.”
KB Home started a guaranteed sale program in February.
The company, which targets first-time, move-up luxury and retirement buyers, has an agreement with a realty company that will list the resale home of a KB buyer. If the house doesn’t sell, the realty company buys it. The price is set with a third-party appraisal, and the house typically lists for close to that cost.
“It’s like getting a free listing out of it,” Tartabini said. “They believe they will have it priced right and it will sell.”
KB uses the program mainly in “dirt builds,” houses started from scratch rather than finished-but-unsold homes. That gives the realty company several months to market the house.
Alfredo and Raquel Matute wanted to buy a new house in the north Valley but were concerned about getting a decent price for their current home. They knew resale prices were falling, and they didn’t want to “give the house away,” Alfredo said.
Yet they also wanted a new, bigger house so they could start a family. They thought the time was right since builders were overloaded with unsold houses and were offering big inducements to buy. The couple decided to buy in a Maracay Homes project in north Phoenix. They signed up for a referral program that set them up with an agent who priced their house at $409,000 in a neighborhood where similar homes were listing for $420,000 to $435,000. They repainted the kitchen and family room with neutral colors and placed some furniture in storage, at the agent’s suggestion.
The house sold in three weeks for $400,000. The couple originally paid $220,000 for the house 3 1/2 years ago, so they could afford to be flexible on the price.
“We were kind of aggressive,” Alfredo said. “We knew we were taking a high risk, but I told my wife: ‘This is the best time to sell this house. The (resale) prices are going down.’ “
Scottsdale-based Maracay builds in Phoenix and Tucson. It offers the program in specific communities in the Phoenix area and in certain deals. The agent agrees to reduce the commission, and Maracay pays its buyer an additional incentive when the sale of the new house closes, said Jeff Johnson, the company’s vice president of sales. Buyers get a price analysis for their resale house before starting the process of buying the new one, Johnson said, giving them a realistic estimate of the house’s worth and helping them avoid losing earnest money and paying other contractual penalties if they don’t close.
“We found out that people had entered into a contract and had unrealistic expectations of what the house was worth,” he said. “If that was the problem, let’s address that at the beginning.”Anything it takes Some analysts see these programs as a sign that builders are in trouble and doing anything it takes to lock in sales.
“These trade-ins signal the real trouble some Phoenix builders are experiencing now,” said Jim Belfiore of Phoenix-based Belfiore Real Estate Consulting “We thought in December home-building was starting to make a real turnaround. But this move signals real desperation by some.”
John Burns, a California-based analyst who follows the national new and resale markets, isn’t so sure.
“Builders have to sell homes,” he said. “Basically, builders that are somewhat desperate and don’t have strong balance sheets need to sell some homes to appease their lenders.
“But that’s the minority in Phoenix, I think. I think the majority in Phoenix has strong balance sheets. The faster they pay down debt, the better positioned they will be to buy land and increase production.”
Burns said he has noticed another sales tactic recently: Builders putting mortgage experts into their sales offices. That means builders are trying to eliminate cancellations, and the pressure they place on inventory and finances, before they happen.
“They don’t even want to go into contract with people who can’t close,” Burns said.
Andrew Holmwww.theholmgroupaz.com
480-767-2738
