Builder guarantees buyers' home values

May 6, 2008 7:17:21 AM PDT
With home prices dropping all over the Bay Area, how do you get gun-shy potential buyers back into the housing market? One homebuilder's idea is to guarantee that you won't lose any money if your home's value drops after the purchase.

This protects you from your developer. Homebuilders say a lot of potential buyers walk into a new development and are nervous the developer will lower prices after they buy. There's a new offer out there that will safeguard against this for the next couple of years.

Lynne Herendeen is not only getting her dream home in Livermore, she's also getting a promise: if she and her husband decide to sell in the next two years and the developer is selling similar homes in the neighborhood at a lower price - he'll refund them the difference in cash.

"It's a buyers market but no one's buying. So if they can give some sort of guarantee that it's going to be okay, I think people might be more inclined to purchase," said Herendeen.

If the deal had been in place two years ago, the developer would have lost in this gamble. When Herendeen first started looking at these homes two years ago, they were priced in the $600,000 range, now they've dropped into the $400,000 range. The deal is also good while they're in escrow. If the developer drops his prices again, he has promised to make up the difference.

"It's a fabulous deal because of how bad the economy is now. We're not going to close for six months so there's a good chance that prices may drop by then," said Herendeen.

The president of Signature Properties says the company has never made an offer like this in its 25 year history. But he also says the company has never seen a market quite like this.

"There are a lot of people that would like to buy something, but no one wants to make a "bad decision," and so we thought let's put together a program that combats that fear," said Michael Ghielmetti, President, Signature Properties.

Buyers are understandably nervous. The bad news seems to keep getting worse. A new study from the website Zillow found home values this year have dropped nearly eight percent and that more then half the people who bought in 2006 - owe more on their mortgages than their home is worth. Federal Reserve Chairman Ben Bernanke says home foreclosures pose a danger to the national economy. He is encouraging Congress to give the Federal Housing Administration more flexibility to help borrowers at risk of losing their homes.

"Doing what we can to avoid preventable foreclosures is not just in the interest of lenders and borrowers, it's in everybody's interest," said Bernanke.

UC Berkeley Business School Professor Tom Davidoff of the Haas Real Estate Group predicts that we haven't hit the bottom yet.

"There's no way prices fall 30-40 percent around Stockton and don't fall at all in San Francisco, that just can't happen," said Davidoff.

He thinks the offer from Signature Properties is a smart one for the company to offer and a smart one for buyers to take advantage of.

"I happen to think it's a good idea to offer price insurance to buyers no matter what, I think it's a good marketing idea," said Davidoff.

He's actually surprised there aren't more offers like this one out there and it's not like Signature is taking an enormous risk, the average homeowner keeps their home for about seven years.

"A lot of people are worried about the next two years, we can't be there forever, but we can be there for two years and we think that's a good time," said Ghielmetti.

Offers like this one are more prevalent in parts of the country hardest hit by the foreclosure crisis. This was the only one we could find in the Bay Area but the idea is catching on as buyers get more nervous and homebuilders get more desperate to sell.


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