So what exactly is "incentive money" when buying a new home? Not all builders offer it; sometimes you only see it offered on the last few homes in a builder's subdivision at close-out. Is it just "play money" provided by the builder to spend at the builder's design center, or a way to help out with out-of-pocket closing money in the form of "closing costs"? Why do builders balk when suggesting that they just take this chunk of money off the base price and thereby lower your monthly payment?

There are several reasons builders prefer, and sometimes insist, that they can't "deal" on the base price of their homes using incentive monies. The first reason is one that would please you if you had purchased another home like it in the neighborhood within the past six months or so. That is, the appraised value for the various floor plans (including your own) in the neighborhood may become compromised, leaving a disenchanted group of homeowners for the builder to deal with. This may only become an issue if current homeowners go to either re-finance or sell their homes, but can also incite negative feelings on the part of those who recently purchased and financed their homes based on higher prices. Although the lowering prices can become dictated by the marketplace, builders don't like to get the reputation of "dumping" their last few homes in a community, or dealing too much on price for a standing inventory unit. They would rather give monies to the buyer in the form of options and upgrades, or help with financing, such as non-recurring closing costs, instead of lower sales price. Unlike an established neighborhood, where you may become dismayed at the prospect of your neighbor selling his house for significantly less than you would because of a "distressed" sale situation, builders can try to hold firm on their pricing, because the neighborhood is brand-spanking new. In other words, it is usually the builder who "creates" the value for an area of homes, and their ability to sell homes in the future may be dependent of how the buying public perceives their selling integrity in recently completed neighborhoods.

Another reason for builder hesitation to deal solely on price is, of course, bottom line. An $8,000 chunk of so-called "play money" offered by the builder for upgrades in their own design center does not translate into the same amount of money to the builder's bottom line. Upgrades constitute a "soft" cost to the builder, as does builder-installed landscaping, patios, etc. The builder's price of doing business with their sub-contractors leaves room for profit (Building homes is generally not a non-profit endeavor!).

Comparing the builder's price for a highly upgraded carpet may result in your finding that the builder's price is slightly higher than similar carpet from a fully retail operation, but the buyer has some distinct advantages for opting to use the money this way. Firstly, nothing is added to your loan amount unless you exceed the amount the builder is offering you in incentive money. And, having the builder install its own sub-contracted upgrades means that the builder must back up its product. If your new carpeting begins to show unusually early signs of wear, you will merely contact your builder's warranty department to send someone out to analyze the problem. The flooring contractor will, in many cases, want to "fix" the problem, especially if it becomes a common problem for them, if it hopes to receive more contracted business from that builder. Just multiply a chronic warranty issue times the number of homes the builder may use the sub-contractor for, and it would mean a substantial loss to the sub-contractor should they not service their installations and product.

Using builder dollars towards financing may also be offered, either in the full sum or partial form. Using money this way is more of a "hard" cost to the builder, even if you are directed to use the builder's in-house or preferred lender as a condition. The builder may "buy-down" an interest rate for you, pay all of your non-recurring closing costs, or have arranged for "special" financing, with a lower-than market fixed rate. If you are permitted to use the money this way, it means real savings to you either in your monthly payments or initial move-in costs. A lessened amount of hard money output for you at closing time can mean the difference between putting in your backyard this summer or next spring, in some cases.

Buyers often ask whether this builder money can be used towards their down payment. The answer is, of course, a big no. Sellers cannot, in any way, flavor the money towards the buyers’ down payment, as it would be considered a "kick-back", conflict of interest, serious lending-rules violation - all of the above. Builders avoid issues such as this like the plague in order to stay in business.

How can you help yourself feel better about the price of the home you are buying, and whether it is a competitive value? Compare the base price of your, home to other new homes in the area by checking public record (county recorder's office or contact a title company or Realtor). If this analysis proves that the builder's price is not out of line, using builder dollars in the ways they permit you to use them may be the deal you feel comfortable with after all.