Seller price guarantees?

Hyundai is offering car buyers a guarantee that should the buyer lose his job he can return the car within a year and be relieved of further obligation under his lease (or some thing like that – check with a Hyundai dealer if you’re interested). Toll Brothers offers something similar: lose your job and they’ll pay your mortgage for 6 months. The object of these offers, of course, is to try to reduce a consumer’s doubt and uncertainty about the future.

Which might work. I know several spec builders here in Greenwich who are trying the same sort of thing. Worried that if you buy their house now you’ll lose when its price drops 40% in the next few years? Fret not, they say, we’ll guarantee to buy back the house in 5 years for what you paid for it. I’m interested, sort of, but so far as I could tell they hadn’t exactly fleshed out the details of their promise like, what backs it up? One builder assured me that there was no need for a bond or any thing like that because “of course the market will recover – no way will anyone be willing to sell this back to me in five years because it will be worth so much more.” That’s nice but I’m not sold.

The personal promise of a builder isn’t going to keep me asleep at night – not when there’s no money available for him to borrow to buy out my customer. And as for bonds, aren’t most of them sold through AIG? That company may not be in business in five weeks, let alone five years. I suppose a builder could come up with some iron-clad guarantee that might work but I’m still dubious about buying his house at his inflated price. Even if my customer were to break even, I think he’d do better buying a new spec house at a hugely discounted price, perhaps from a bank. That way, if the market does continue to fall, he’ll have already secured his protection and if by some miracle prices rise the appreciation will belong to him, not the builder.

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2 responses to “Seller price guarantees?

  1. anonymous

    Your skepticism is well-placed

    Guarantees are only as good as the counterparty’s creditworthiness…which, as current crisis indicates, is dubious for nearly anyone

    Also, would price risk to buyer of a new spec house built w/uncertain quality by a spec builder during Bubble

    Need to carefully assess geologic, structural, technical and aesthetic quality and risks of house to really understand if a supposedly “low” price represents good risk/reward value, no matter alleged warranties/guarantees….

  2. Retired IB'er

    Of course you are correct, Chris, who in the right mind would accept a put to a builder without a bond, or some other sort of collateral. Ridiculous. When will people realize its all about the price.

    Says to me these builders are still in denial about the world of hurt staring them in the face. How many other builders across the country tried to stem the tide with other gimmicks (like get a free Rolls, or upgrades or other silly ideas) which didn’t work. Nor will it work in Greenwich. The only thing that has a chance of yielding success is to cut prices. And that will only work, maybe, if they cut fast and deep.