Options snare many a buyer Incentives: Whether offered in the form of a finished basement, an extra fireplace or help with closing costs, incentives have become a valuable tool in the marketing of new houses.

THE BALTIMORE SUN

It was time for Ron and Nancy DeHaven to pack their bags again. This would be move No. 14.

Their youngest child had just graduated from high school and Ron, a U.S. Department of Agriculture veterinarian, was being transferred to Maryland from Sacramento, Calif. Going cross country wasn't going to be easy.

There was so much to learn with just a few days' time to buy a house while visiting the area in October. They had to get to know the lay of the land, figure out where they wanted to live, how far their money would go and who the quality builders were in the area.

"Obviously, we were looking at price first," Nancy said as she kept unpacking a mountain of cardboard boxes still littering her new home two weeks ago. "We [preferred] a small town that's close to a large town."

With those thoughts, they rented a car and drove around the area. They stopped at gasoline stations and doughnut shops, gathering information. Then, armed with a short list of builders and accompanied by a Realtor, the couple ended up in the Ryland Group Inc.'s Walden subdivision in Crofton, where homes sell for an average of $312,000.

"We were drawn to Walden because of the incentives," Ron said of the community of large, single-family homes bordering a golf course.

In an effort to sell the remaining lots in the subdivision, Ryland was offering to throw in a finished basement with a half-bath, a $9,000 value. The builder also was offering $9,000 toward closing costs. In addition, Ryland had advertised that homes in the community came standard with a brick front, a fireplace and a bumped out [enlarged] room, such as the family room, a package worth about $20,000.

After touring the model home several times and walking around the available lots, the DeHavens knew they'd found their next home. After a little negotiating, they agreed on a 2,450-square-foot, four-bedroom home with a bumped-out kitchen nook.

"By the time we got through with everything, we were able to afford a house in a nicer neighborhood," said Ron, stressing that the incentives allowed him and his wife to get more house for their money. "[Those incentives] certainly helped get us in the door here."

Incentives. It's one of the hottest marketing tools right now for builders across the Baltimore area, according to local real estate professionals. With a large surplus of new homes for sale throughout the area, coupled with intense competition, builders are doing whatever it takes to grab a buyer's attention, get him or her into the homes and make a sale.

Need help with closing costs? No problem.

Want a finished basement? You got it.

Interested in frequent-flier points? They're yours.

But, with all the promotions and incentives, many buyers wind up feeling dazed and confused after shopping for a home. Yet, it doesn't have to be that way, industry experts and builders said. Instead, if buyers do a little homework, they will come to good decisions that will benefit them and their new homes for years to come.While the circumstances may differ, builders offer incentives for one reason -- they want to sell homes.

Generally, in areas where there is a large demand for homes and little competition, builders will offer few incentives to buyers. But if the supply of homes is greater than the demand, or if competition is intense, builders are more likely to offer incentives as a way to draw attention to their developments and sell homes, according to William Young, director of consumer affairs for the National Association of Home Builders.

In a 1996 Builders' Economic Council Survey, produced by the National Association of Home Builders, members were asked what marketing strategies they used.

Of the 403 members who responded in offering one or more:

36 percent said they include optional items at no additional charge.

26 percent said they pay all fees and closing costs as allowed by law.

25 percent said they offer special price incentives.

22 percent said they offer special preconstruction prices for new phases of developments to attract buyers.

In the DeHavens' case, Ryland had about eight lots left in the golf course community. The prime lots that backed onto the golf course were all sold, leaving ones that backed onto a road, said Kimberly Brannon, community sales manager for Ryland Homes at Walden.

"We really want to get rid of these lots," Brannon said, referring to the bevy of incentives being offered to homebuyers of the remaining lots. "You never do it if the homes are selling that well [but] our goal is to be out of here in 90 days."

There's also the competition factor, which looms large with the number of builders in the Baltimore area. In this case, incentives are strong marketing tools that help distinguish builders from one another and attract buyers' attention, said Tim Naughton, sales manager for the Ryan Homes Inc. Baltimore South Division.

"We try not to get carried away with them and still be the best value overall," he said.

In addition, Ryan offers monetary incentives to attract first-time buyers and uses other incentives to call attention to a subdivision's grand opening or to a seasonal event, Naughton said.

For its part, Ryland uses incentives to provide additional value to customers, help maintain the value of its homes, as well as the company's position in the marketplace, and to help attract certain kinds of buyers that a subdivision is targeted toward, such as empty-nesters or first-time homebuyers.

"[Incentives] are not chosen haphazardly. Every community has a strategy," said David Heneberry, vice president of marketing for Ryland.

But, with buyers visiting an average of 14 communities before choosing one, competition is a key reason for the use of incentives.

"Our only way to compete is to provide the best value. Incentives have their role in the overall marketing strategy," Heneberry said.

Brannon agreed, noting that sometimes builders must take a loss by offering incentives. "We're basically paying [buyers] to come in. There's a lot of competition out there. If we say 'No,' [buyers] go to builder B."

A maze of incentives

Depending on the price range of a home, incentives can range from $2,000 toward closing costs and a free washer or dryer to thousands of dollars in options.

Housing Data Reports, in its 1996 year end review of new-home trends, found that builder contributions toward closing on single-family homes increased in 1996 over the year before. In fact, in most areas around Baltimore, builders contributed almost 2.5 percent of a home's base price to closing costs, the report found. Builder contributions ranged from a low of $2,000 to a high of $19,000, depending on the type of home and its cost.

The report also found that the most popular home options in the Baltimore area in 1996 were fireplaces, luxury baths, floor upgrades and upgraded carpet. The report predicted that popular options this year will include side-entry garages, three-car garages, home office wiring and gourmet kitchen upgrade packages.

Choosing incentives

Along with incentives such as money for closing costs and options, frequent-flier miles, back-yard decks, appliances and upgraded cabinets are some of the items being offered to homebuyers.

Generally, the more expensive the home, the more incentives are offered, Brannon said.

But for many buyers, regardless of the price of the home, choosing the best incentives can be difficult and confusing, although it doesn't have to be. When it comes to choosing incentives, buyers need to be educated, real estate professionals and consumer advocate experts said.

"Builder incentives are marketing tools, so you have to be very careful," said Jordan Clark, president of the Washington-based United Homeowners Association, a nationwide advocacy group for homeowners. "Don't be fooled by these incentives. There's no free lunch. You're paying for it somehow."

For example, many builders will tout a home's warranty, Clark said. But buyers need to be aware that home warranties are not insurance. Typically, these warranties last one year on major items and 10 years on structural elements, he said.

"The warranty is purchased by the builder to insure against [items] he should repair anyway," Clark said. "The warranty is to protect the builder, not you [the buyer]."

Whenever given a choice between materials and options or money toward things such as closing costs, buyers should choose the money, Clark said.

Brannon said a buyer's financial situation often is the best determinant of whether he or she should choose options or money for closing costs. Some buyers have money in the bank and don't need help with closing costs, while others, who need every penny to buy a home, should forgo option incentives and use whatever money is offered, Brannon said.

However, buyers should think twice about using incentive money to reduce the price of the house, said Tom Champion, a residential loan officer for Ryland Mortgage in Lutherville.

"That's the worst option a buyer can take; to reduce the sales price," he said.

For example, a buyer of a $150,000 home who is putting 10 percent down and paying zero points needs a loan for $135,000. In addition, in Baltimore County, the buyer would need another $8,651 to pay closing costs and prepaid items, Champion said. If the builder tells the buyer he will give him $5,000 toward closing costs, the buyer needs just $3,651 in addition to his $15,000 down payment, Champion said.

But if the buyer takes the option of subtracting $5,000 from the price of the home, and still puts down 10 percent, he will ultimately save just $500 off the down payment and $350 in closing costs and prepaid items, Champion said.

Not only did the buyer not come out ahead, but he also would have to pay more in capital gains tax when he sold his house, Champion said.

Before visiting communities and inspecting new homes, buyers need to consider where they want to live, what they can afford and then prioritize what elements are important to them in a house, said Bruce Hahn of the Arlington, Va.-based American Homeowners Foundation, a nonprofit consumer group that has programs to assist buyers and sellers.

Everything's negotiable

"Everything is always open to negotiation," he said, stressing that buyers need to know the market and look for a quality builder.

Decisions about which options to choose depend on individual taste, but investing in kitchens and bathrooms, without going overboard, are generally good choices, Hahn said. Also, when discussing incentives, if a builder is offering a free fireplace and the buyer would rather have upgraded kitchen cabinets, the buyer should ask if, instead of allotting $3,000 for a fireplace, whether the builder would be willing to put that money toward better cabinets, Hahn said.

Finally, buyers need to consider the whole package that comes with a home they're interested in, not just the incentives, said Ryan's Naughton.

pTC "Once you move into a home, the incentive is gone," Naughton explained, stressing the need to choose a quality builder, a point the DeHavens heartily support.

Clark agreed. "Once you close on that house, you have no place to go but the court system [with problems]. I've often said you have more protection on your toaster than you do on your house."

Costs of options in 1996

Single-family homes

Jounty.. ....Option ..Purchase ...Amount. .Most popular options

...... ......Low.. ...High... ....Average..... .................

Arundel.. ...$8,000...$50,000.. ..$18,000. .Fireplace, hardwood

......... .......... ......... ..... .......floor, bump-outs...

Balt. Co.....$5,000. ..$25,000.. ..$19,000. .Luxury bath, fireplace,

..... ............. ............ ...........floor upgrade.......

Carroll... ..$5,000 ..$30,000.....$19,000...Fireplace, luxury bath, ........... .................. .............bump-outs...........

Harford......$5,000 ..$40,000.. ..$14,500...Fireplace, luxury bath, ............. ............. ................walk-out basement...

Howard.......$8,000 ..$55,000. ...$22,000...Hardwood floor, carpet

.... ............... .......... ...........upgrade, walk-out basement

Townhouses

KACounty.. ....Option.. Purchase....Amount....Most popular options

......... ...Low..... High........Average.......................

Arundel..... $2,000.. $30,000 ....$10,000 ..Luxury bath, fireplace, ........... .......... ......... ............morning room........

Balt. Co.. ..$3,000.. $20,000.....$8,000....Fireplace, finished

............ ......... .....................basement, floor upgrade

Carroll... ..$3,000.. $7,500......$8,000....Fireplace, walk-out

............ ............... ...............basement, carpet upgrade

Harford.. ...$2,500.. $17,500.....$7,000....Fireplace, luxury bath, ........... .......... .....................deck........ ..........

Howard.... ..$4,000.. $30,000 ....$12,000...Carpet upgrade,

............ .......... ............. ......cabinet upgrade, fireplace

Condominiums

KACounty.... ..Option.. Purchase .. Amount....Most popular options

....... .....Low..... High...... .Average........ ..............

Arundel.. ...$1,500.. $3,500.... .$2,500... Cabinet upgrade,

........... ............... ............... appliance upgrade,

............. .............. .............. carpet upgrade

Balt. Co... .$2,000 ..$7,000... ..$3,000... Fireplace, carpet

....................... ................... upgrade, security system

Harford.. ...$1,500 ..$15,000.. ..$3,000... Appliance upgrade,

.......... ... ............. ............... washer/dryer, cabinet upgrade

Howard..... .$4,000...$4,000... .$4,000.... Carpet upgrade, mantel ............ ....... ........... .......... upgrade, luxury bath

Note: Options costs not available for Carroll condominiums.

Source: Housing Data Reports

Builders' help with closing costs

Closing contributions by builders in 1996:

SINGLE-FAMILY HOMES

G=County .............. Low ...... ..... High .... ...... Avg.

Anne Arundel .......$2,000 .... .....$10,000 .... ....$5,000

Baltimore ..........$7,000 .... ......$7,000 .... ....$7,000

Baltimore Co. ......$2,000 .... .....$10,000 .... ....$4,500

Carroll Co. ........$2,000 .... .....$10,000 .... ....$4,000

Harford Co. ........$2,000 .... .....$19,000 ... .....$7,500

Howard Co. .........$2,000 .... .....$10,000 .... ....$9,000

TOWNHOUSES

G=County ....... ...... Low ...... ..... High ...... .... Avg.

Anne Arundel .. ....$2,000 ..... .....$9,000 .... ....$4,500

Baltimore ..... ....$3,000 .... .....$10,000 .... ....$6,500

Baltimore Co. .. ...$1,500 .... .....$15,000 .... ....$5,000

Carroll Co. .... ...$2,000 .... ......$3,000 .... ....$2,000

Harford Co. .... ...$1,500 .... ......$5,000 .... ....$2,500

Howard Co. ..... ...$2,000 .... .....$10,000 .... ....$5,000

CONDOMINIUMS

G=County .............. Low ...... ..... High ... ....... Avg.

Anne Arundel .......$1,000 ..... .....$3,500 ... .....$2,000

Baltimore Co. ......$1,000 .... ......$5,000 ... .....$3,000

Harford Co. ........$1,000 .... ......$2,000 ... .....$1,500

Howard Co. ........ $1,000 .... .....$12,000 .... ....$5,000

Note: Condominium contributions not available for Baltimore City and Carroll County

SOURCE: Housing Data Reports

Pub Date: 4/20/97

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