The truth about new home price guarantees

A couple of weeks ago at a building industry function, I asked a panel of homebuilders including reps from Centex, Standard Pacific and John Laing why weren't offering price guarantee programs along the lines of those offered by KBHome and Ryland.

Their answer: most builders will refund money to a potential buyer still in escrow if the value of their home falls in between the time they sign the contract and closing, but you have to ASK for it. The fact that KBHome and Ryland are promoting the program has more to do with their ad strategies and creating higher comfort levels among potential buyers than a totally unique program. Although the fact that they have announced these programs would certainly make it easier for a home buyer to benefit, it's probably good advice to simply ask all builders what they plan to do should prices fall before homes close escrow.

Builder price guarantees working in Central California

Arguing that it's higher interest rates that will most likely kill a real estate deal because it puts borrowers over lower (and re-standardized) debt-to-income ratios, builders in Central California have started offering price guarantees through the build-out of various projects -- which in one case could be 2.5 years. From a story in the Fresno Bee:

More home builders are offering price guarantees to calm the fears of prospective buyers who are afraid the biggest purchase of their lives will immediately fall in value.

"It's a fairly new concept that just crept up in the last few months," said Patrick Duffy, a housing analyst who operates MetroIntelligence Real Estate Advisors in Southern California. "A lot of [builders] are taking their marketing budgets and applying them toward price guarantees."

KB Homes, Pacific West Cos., Granville Homes and others are telling customers they will guarantee the lower base price if the prices fall during a certain period.

Granville and KB, which has four tracts in Fresno and Madera and is the fourth largest builder in the area in terms of sales, offers the price guarantee during escrow, which is typically five or six months, said Augie Dent, division manager.

Pacific West, a newcomer to the area that is building the Montage condominium complex in Clovis, is taking a more aggressive approach. The company offers the guarantee until the project is finished and the last condo is sold.

"That's anytime between now and 21/2 years," said Michael Plowman, sales manager of Montage at Armstrong and Herndon avenues. "When the last one is sold, we'll rebate them whatever the appraisal says the difference was [between the price the buyer paid and the price at the end]."...

"The interest rate is what will disqualify them...When interest rates go up, the debt-to-income ratios don't work anymore."...

Increasingly, home builders, such as Granville Homes in Fresno, will offer additional incentives to protect home values in their subdivisions, said Michelle Brunn, a sales manager for Granville. But this is a serious market downturn, leading to the price-protection programs. KB Homes also says it will pay for the cost of locking in an interest rate to ensure it doesn't rise during the escrow period...