My mother is getting ready to purchase a new home. Closing is in two weeks. While negotiating the price the builder agreed to her offer but only if the price would be shown as full listing price in the ‘purchase contract.’ Later in the ‘purchase contract’ it shows the builder as giving my mom a $12,500 “builder bonus” to make up the difference between the real, negotiated price and the original, listed price. When I asked the builder why he did this he said something like “I don’t want anyone else to know that I came down on the price down and how far.” OK – I can understand that – but would that be the only reason he might have done this? Also, will allowing the builder to do this result in any adverse tax or other consequences down the line?
I smell the potential of something rotten here ---- Anything else I need to know or is this pretty much as the builder described it - just a way to hide the real selling price from the present competition and future customers.?
While his explanation is kind of unusual, this is fairly standard, when renting office space, for example, there is often a $/sq. ft. “tenant improvement” allowance, or for condo buyers the ability to choose $X of finishes. This generally allows the seller to make some additional profit: i.e. he’s giving you something valued at X retail, but since he’s performing the work himself (or with his forces), he’s not paying the full market value (if that makes any sense). So, your mom is technically saving money, just not the full $12,500.
I work in real estate. In New Jersey we call it a “seller’s consession.” Usually it’s so the buyer can get a larger mortgage and/or have help with closing fees.
With New Jersey real estate skyrocketing, some buyers need all the help they can get. This is not illegal if both the seller and buyer agree to it. Other states may vary, so consult your local REALTOR before taking action.
No biggie at all, but there are some smallish issues: (1) if the community has a property transfer tax based on sales price, then that will be higher because the true sales price was higher. In my state, though, the seller pays this, so no big deal. Also (2) often property taxes are based on last sales price. So given, say, 80 mils based on 50% value, that $12500 dollars results in $50 extra taxes per year. (3) Similarly insurance could cost that much per year.
Thanks Chairman Pow — but the $12,500 isn’t for improvements of any sort - it’s a cash “builder bonus” taken off of the original purchase price. So the builder will not be performing $12,500 worth of additional work.
My mother is paying cash for the house so, in this case, it would not be so that she can get a bigger mortgage. Closing fees will mostly consist of $700 for owner’s title insurance since there will be no mortgage, points, mortgage insurance and such.