Above Invoice?

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M. Anthony Carr is porting tips from car sales to real estate, but he seems to have visited too many Honda dealerships:

You must switch from selling the product to selling the deal.

We see this strategy in plenty of other sales. The auto industry is famous for it -- 0 percent financing, $500 above invoice, employee discount price. None of these strategies has anything to do with the product. They all entice potential buyers with the deal.
I don't know about you, but to me $500 above invoice doesn't sound like a deal. I'd push for $500 -- or more -- below invoice, if possible.

Below-invoice pricing is pretty common, according to automotive.com:

In fact, over the years, between 25 percent and 45 percent of customers have gotten bids below factory invoice price.
However, Mr. Carr's recommended home selling strategies feel like winners -- including giving cash up front:
The buyers are borrowing $250,000 -- a quarter of a million dollars -- and dropping the price by $10,000 reduces their principal and interest payment from $1,498 to $1,438. Is that move enough to get them excited?

Let's turn that around and offer $7,500 -- 3 percent of the loan amount -- at a full-price contract and see what it does for the buyers. They could use it for closing costs. It could be a lot of money in their pockets. They could use it to make payments over the next several months. It represents more than five months' worth of payments at $1,498 a month.

This homebuyer behavior is entirely sensible and rational, simply because, the $7500 upfront is a low-total-cost loan that gives them cash when they can use it, with marginally small payments for the next 30 years. A homebuyer could take out an additional personal loan to get the cash, but the extra time and cost of discovering and executing a second transaction (one with a higher, possibly non-tax-deductible interest payment) means it's worthwhile just to merge the two transactions.

In other words, don't feel bad about buying a car above invoice; if you're savvy, the dealer is funneling cash or extras to you upfront, and not just taking you for a ride.

UPDATE: See also Mr. Carr's retelling of the story of one of the first recorded cases of eminent domain -- from 874 BC:

The earliest one I can recall was 874 BC when Samaritan King Ahab took a vineyard next to his palace. He wanted the vineyard of Naboth the Jezreelite (I Kings 21). But Naboth wouldn't sell it to the king because the land had been in the family for so long. Naboth, being the spoiled man he was, got depressed, wouldn't eat his supper and went to bed to pout.

Enter Jezebel. Ahab's wife, Jezebel, told Ahab not to worry, she would deliver the vineyard -- "Do you now govern Israel? Arise, and eat bread, and let your heart be cheerful; I will give you the vineyard of Naboth the Jezreelite." (21:7)

She commenced to plot a false accusation of blasphemy against Naboth, leading to his execution by stoning. The land was left for taking -- which Ahab took. And thus, one of the first recorded incidents of eminent domain.

And the takings were certainly not for "public use".

2 Comments

This rebate from the seller to the buyer could run into problems. The buyer is supposed to rep the source of his down payment, and I can't believe that mortgage lenders don't have other protections in place to prevent an inflation of price via this mechanism.

prevent an inflation of price via this mechanism.

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This page contains a single entry by Kevin published on August 26, 2005 10:09 AM.

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