Photo / Fred Field
Developer Mark McClure of GenX Capital Partners
December 6, 2022
Developer tackles high interest rates with ‘buydown’
COURTESY / GENX CAPITAL PARTNERS LLC
A new deal pays part of the interest rate for the first 20 buyers at the Mark at Cumberland Foreside, a condo development that recently broke ground in Cumberland.
As interest rates remain at a high level and the housing frenzy of the past two years cools down, a Maine developer has launched an innovative strategy to entice buyers to his $22 million, 45-unit condo development in Cumberland.
Mark McClure, managing partner of GenX Capital Partners, said he would “buy down” interest rates by 4% for the first two years for the first 10 buyers at the Mark at Cumberland Foreside, a development that broke ground in November.
Using the current residential rate, the buy-down would mean buyers’ paybacks to their lenders for the first two years would be made at an interest rate in the low to mid 2% range, a range last seen in 2020.
The deal started this week.
The goal is to eliminate the interest rate obstacle for potential buyers, he said.
High interest rates have caused sales of new condos and homes to come “to a screeching halt,” he said.
McClure said he’s offering the 4% buy-down deal to the first 10 buyers. He’s offering a 2% buy-down to for second 10. For cash buyers, he said, he will offer a sizeable cash bonus at closing.
In late October, the Federal Home Loan Mortgage Corp. (OTCQB: FMCC), or Freddie Mac, reported the 30-year fixed-rate mortgage broke 7% for the first time since 2002.
As of Dec. 1, Freddie Mac said the 30-year fixed-rate mortgage averaged 6.49% and is declining, but is still more than double the rate a year ago at this time, when the 30-year averaged 3.11%.
The Mark, a mix of one- and two-bedroom units on a 3-acre parcel at 100 U.S. Route 1 in Cumberland Foreside, is expected to offer units in the $450,000 to $750,000 range and will be available in 15 months.
At the groundbreaking, McClure said he’s already hearing from three groups of potential buyers: Empty nesters in the same ZIP Code; people continuing to flee big cities like New York, Boston and the District of Columbia; and investors, who hope to rent out units at a profit.
“Sales haven't stalled, it’s just that the interest rate issue has become a barrier to getting to a purchase and sale agreement faster than in the past and so, rather than drop the price, I figured why not address the underlying issue and offer to buy down the interest rate for the first two years so they can lock in to a rate they were accustomed to see two years ago,” he told Mainebiz.
McClure said that, in the next 12 to 18 months, he expects to see rates start to come down considerably, giving buyers the opportunity to refinance at the lower rate.
Implementing the strategy involved working through legal language, logistics and budget.
“It has had tremendous success with other developers in New York City and Miami, so we figured we would follow suit,” he said.
The buy-down will be financed internally on GenX’s end, he said.
Essentially, he said, GenX will give the buyer a check at closing. The check will cover two years of the 4% in interest payments. The deal is financed through GenX’s marketing budget.
At closing, the mortgage company can take the funds and put it into escrow for the buyer, or buyer can just apply the money to their purchase, effectively making their rate 2.5% or thereabouts.
“They will close their loan with the bank and sign the loan docs with the bank for whatever rate they agreed – 6%, 6.5%, 7%,” he said. “We will hand them a check for 4% of that, per annum for two years for the first 10 buyers. So their rate is now 2.5%. They can pay directly, whatever they want to do.
“This has more of an impact than handing out flyers,” he said. “We get more bang for our buck.”
McClure said the deal also benefits investors, “who can lock into a great rate, then turn around and lease these up and enjoy ample cash flow.”
McClure said he saw the success that other developers were having with the strategy as they grappled with the interest rate issue and looked at it as a great way to spur traction.
Overall, he said, the current interest rate environment has risks to the development community.
“No doubt it’s slowed sales or stalled sales as buyers look for rates to go down,” he said. “The smart real estate investors are jumping in now, locking into interest rate buy-downs or negotiating better prices and, when the market corrects in two years — like it always does — they will be sitting pretty.”
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Anonymous
December 9, 2022
Highly leveraged speculative developers will most likely have financial problems as the economy continues to weaken, as they always do at the end of every bull mkt. i wish this project success, but we have all seen how this movie ends.
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