Sales Incentives, Do They Work?

Sales incentives are just like us, they come in all shapes and sizes; some work really well and some are virtually worthless. I have said this many times, and regular readers will be aware of this, that price fixes everything. It is my mantra.

Let’s discuss the shapes and sizes. Here in Phoenix, Arizona it is quite common, and increasingly so, in this slow market, for new home builders to offer inducements to both buyers and buyers agents. Incentives to buyers range from upgrades to the home itself, i.e. Granite counter tops or premium appliances, low interest rate or no money down loans, free swimming pools and sometimes free automobiles. Incentives to buyers agents are almost always in the form of higher commissions (Realtors only respond to cash or food) to try to persuade agents to bring their clients round.

The advantage to the seller/builder is obvious. They desire to keep prices up, so that all future sales can remain higher. Offering incentives allows them to not lower prices, but still attract buyers. Which is good for them.

But is it good for the Buyer? Well, please remember that, whatever the incentive, the buyer is the one who is paying for it. I would agree that upgrades to the home itself are a benefit. However, when your agent receives an 8%, as I have seen offered in the greater Phoenix area, you, Mr. and Mrs. Buyer, are paying that commission and paying interest on it, most likely, for the next 30 years with your mortgage. I always have believed that paying much higher commission to an agent as an “inducement” indicated that the buyer is paying too much. I have always questioned the ethics of such an arrangement as an agent is supposed to represent the best interests of a client. However, the choice of either a 3% or 8% commission is bound to sway the thinking process; but to whose benefit?

As to receiving a “free” car. Well, I am not an accountant, nor do I play one on T.V., but I believe there would be tax consequences for a buyer. Also, for a private seller offering such an arrangement, it would also have tax consequences as it affects your tax basis in the home. Please consult your C.P.A.

Having said all that, it is extremely difficult to persuade a builder to drop all this fancy packaging and just lower the price for reasons stated above. Remember, in many communities in the Phoenix area, builders are selling the exact same properties that they could build, market and turn a profit on for the low $100’s three years ago, for the mid $200’s today. Sure, a little of that goes to higher material costs and inflation, but please! They could sell you a property for much less but they have an obvious vested interest to maintain price levels.

Eventually, prices will adjust to correct market levels driven, as much as anything, by falling prices on re-sale homes.

So, before you drive that “free” car, drive a hard bargain first. Happy Haggling!