You Trade-In Your Car…Why Not Your Home?

By Paul Michael on 5 August 2009 35 comments
Photo: Paul Michael

Here’s a question for you that has been bugging me for years; why can’t home-builders follow the auto dealer’s classic model of old for new, and let people trade-in their old homes for new ones?

Currently, when you’re in the market for a brand new car, or a used car, you can take your old one along to the dealership and trade it in. Like most deals, there’s both an upside and a downside to this system.

The downside is that you’ll lose money on the car you trade in. You will always get more selling it yourself, but most people are willing to swap that cost for the convenience of an immediate trade-in.

On the upside, well, there’s a list of great advantages to this deal. First, the dealer gets a car for several thousand dollars less than its retail value. With some dollars invested in wholesale parts and detailing, the dealer will make a handsome profit. For the owner of the trade-in, the ability to drive into a dealership with one car and leave with another is golden. Plus, the dealer does all of the paperwork. And if you owe more than the car is worth, you can still trade it in and apply the negative equity to your new loan. Not ideal, but it still means you can get into a new car. Therefore, trading a car (the second largest purchase most of us make) has been made easy by the auto industry.

Now take a look at the largest purchase we will ever make: our home. If you walk into the office of a home builder and ask them if you can trade-in your old home for a new one, you’ll probably be laughed out of the building. But why?

Think of it in the same terms as the car trade-in for a second.

Put yourself in the position of thousands of homeowners in America right now (you may not have to, you could very well be one of them). These homeowners are in a house that has depreciated in value and are unable to sell it. It could be that they’re upside-down, or just don’t have enough equity to cover costs. But the state of the market means that they can afford to upgrade to a larger house. And as many people have outgrown their small homes and need to get into a larger property, the only thing holding them back is the dead weight of the old home. Plus, many people are trying to save for a new home, and making the upgrades to the old home to make it more saleable is just not possible.

In today’s market, it can take many months (or years) to sell a property. During that time, the homeowner has to keep the place looking spotless for potential buyers. And once it’s sold, there’s commission to pay and, unless the owners are very lucky, a storage unit to pay for while they search for a new home. Many families are left homeless, renting a property or living with relatives, while they search for a new home.

Now apply the “home trade-in” idea and see what happens. First, the home-builder appraises your old home and offers you a percentage of its value, say 90%-95%. For that, the home-builder will immediately take the old home off your hands once the new home is built. The advantages to the builder are huge. They do get an old house, but they pay below-market value for it. Using their resources, they could flip that house in weeks and resell it very quickly for a tidy profit. Even if they break even, they have still made money on the sale of the new home. And they will get hundreds of new buyers through the doors to purchase a home, which will stimulate sales and help get costly inventory of their backs.

For the homeowner, it’s a dream come true. They don’t have to worry about selling a home. They just walk into the home builder and trade it in, taking the loss for the convenience. If they’re upside-down on the home, that can be rolled into the cost of the new home. It may only be a few thousand dollars, but even if it’s $20-30,000, that equates to a small percentage of the new home’s price. The rough estimate is about $7 for every $1000 you finance, which makes an extra $140-$210 per month. The new homeowner doesn’t have to pay fees or commissions on selling the old home, that will all be taken care of by the home builder. And when the time comes to move in to the new home, they hand over the keys to the old home within a few days of moving out. They never have to be homeless or pay for storage, hotels or rental property.

Am I dumb in thinking this is a system that should be available nationwide? I’m sure I’ve oversimplified it, but it seems to me that this is something that could help millions of families, stimulate the housing market and, in effect, keep both home buyers and home builders very happy. If there are any representatives of the major home builders out there reading this, please weigh in. I’d love to know why such a positive system cannot be put in place. And if you can't think of a reason, maybe you should start offering this to customers...something tells me you'd sell a whole lot more homes.



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35 discussions

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Xin Lu's picture
Xin Lu

When you own a home you will also have to deal with taxes and maintenance  I think maybe home builders just don't want to do it.  Home builders' business is to develop a piece of land as efficiently as possible, profit, and then leave.    I wrote a recent blog post about applying Cash for Clunkers to the home market, though.  Thought that perhaps you'd find it funny:

Paul Michael's picture

for a few weeks, while they flip the home. Seems like a small price to pay, and it could be done easily.

Guest's picture

This is an interesting concept, but the reality is... there is nothing stopping a builder from doing this right now.

The problem is new home builders (especially the smaller ones) are just as limited in their financing as the average home builder.

Essentially, the builder would need the credit to sustain two mortgages for each house they intend to build (not to mention the risk tolerance).

If the builder was in the process of building 3 homes, he would have 6 mortgages to worry about. The prospective buyer might come across hard times and need to declare bankruptcy, etc...

That would be a lot of risk.

On the other hand, this business model might be attractive to a larger builder who could offord to carry these loans on their own...assuming they wanted to take a risk on the home, when the market is already FLOODED with units for sale....

Guest's picture
some guy on the internet

The amount of risk and overhead associated with such a venture is the brick wall. In addition automobiles are far more "liquid" in the sense that they can be moved to different markets or easily sold as scrap, if necessary, with little expense to the dealer. Apples to oranges here people. Why can't I trade in my brown bag lunch at Mcdonald's for a Big Mac and fries.

Guest's picture

Not sure that it would work. Who then would take the old home. Would this not just put a new glut of homes on the market if people could easily trade in? I think we have to work through inventory first, then talk about trading up. With cars, you can send them to scrap heap - not so with homes.

Guest's picture

Keep in mind that not every home is "flippable." Besides the cost buying back the old house, you would also have to pay for an inspection, legal fees for the ownership change, insurance, utility bills, plus realtor fees once it came time to sell the property.

Not to mention the risk associated with real estate. Cars are much less risky and dealers don't always make a profit on trade-ins anyway.

Dollar for dollar, it is probably more effective for the builder to do what he does best: build homes.

Guest's picture

This plan sucks for the builder, great for the buyer. Would never work.

Guest's picture

Actually have done this. It was actually with the realtor who had built a house as a spec house. It had been on the market for over a year. We bought their more expensive house and they bought ours and resold it. They got out of a big mortgage and into a smaller one in the meantime. Worked out very well for us.

Guest's picture
a naked guy with hairy legs

Sign me up! I would love to get out of my house since I ca't get it sold after over a year on the market.

Guest's picture

If I am a builder, the last thing I want is to take out more debt, and then be stuck with properties for an unknown period of time. I am sure that people will choose to trade in houses in places where the market is not hot, and would otherwise take months to move the house. It is a great idea, but in reality it would be a rather poor business practice. I personally would not buy stock in any publicly traded company doing something like this. Simply put, too much risk.

Guest's picture

The issue is who you are moving the work to... the "dealer". Homes are expensive, immobile, un-recycleable, and complicated legally and financially. you assume that a builder could sell a house in weeks and not spend 10% of the homes value in transaction/ marketing costs. The other part is the risk for foreclosure, if you are upside down and already need a new house that is risky behavior. Are you sure you can afford an even larger payment? If foreclosure is needed will they be able to recoup after the next sale? Inspections, appraisals, repairs, insurance, taxes, titles, deeds, home owners associations, maintenance, and that doesn't get into actually reselling the property. I don't know any bank that is going to give you a decent rate on a -10% to -20% equity loan. If it was profitable I'm pretty sure someone would be doing it.

Guest's picture

Standardized pricing. Used cars have standard blue book values to start from. Houses have way more factors that go into their price.

Guest's picture

This wouldn't work for a lot of reasons, especially with one company assuming all the risk. Like you said, it's the LARGEST person most people make in their lives which means your're dealing with larger amounts of money and risk. Now, let's say there are two seperate entities involved. One company who builds, one who flips. You could get those brother's in Texas they show on TV to do the flipping.

Guest's picture

If you hadn't noticed, we're in the middle of the biggest housing crisis in the last 60 years. A good percentage of those who own homes are seriously underwater - owe more on the house than its worth. NO ONE is flipping houses in a few weeks!!! NO ONE.

One thing will stop the crisis: foreclosure. Sure it's painful but what you're doing is exchanging those owners who can't afford the house with those who can afford the house. With foreclosure, the natural market bottom of the market is quickly achieved and we can go forward.

All these cockamamie ideas hatched by our government are prolonging and deepening the crisis. But because we are a nation of financial illiterates ruled by financial illiterates, the problem will fester for years.

Has anyone noticed that the FDIC, the federal department insuring your bank deposits, is now out of money? That should really worry you.

Green shoots, my ass.

Guest's picture

Hi! Can you point me to more articles about the FDIC being out of money? I've been saying people were dumb to believe them all along, but people won't listen. lisa

Guest's picture

The home builder definitely wouldn't be able to quickly move a home unless it was discounted significantly. Buying something for 90-95% of the market value is only 5-10% off full price. Thats close to realtor commission and holding costs. You'd have to have much more significant discount to make a flip practical and discounting it that much makes it a bad deal for the home owner.

Plus the home builders probably just don't want to be in that business nor take the risks of holding homes.

Guest's picture

Flip it in a few weeks? What kind of housing market do you live in? I'd like to move there. Houses sit on the market for months to years, not a few weeks.

Guest's picture

This is how we got into our current home in June 2007. That was just at the beginning of the current crisis, but our builder is still doing this for new owners today.

Here's how it worked: he purchased our (fairly cheap) bungalow in an iffy neighborhood for our full asking price. In turn, we bought a nice, just-finished home, also at full asking price. He flipped our old house pretty quickly; I think the new owners turned it into a rental.

We're pretty happy with the results and, based on the builder still using this model, I think it's worked pretty well for him, too.

Paul Michael's picture

you live in Colorado! That's cool.

Guest's picture

Quick back-of-the-napkin calculations on looks like Trade in Value is between 50% and 70% of the Retail value (I know cars have a private party value, but houses don't). So, in addition to what others have said, here is the problem with this plan: when someone opts to trade in their car for 50-70% of what its worth, they're losing anywhere from $1,000 to $15,000 for the sake of convenience. If they were to do this same thing with their HOUSE, they would lose $50,000 to $500,000+ for the sake of convenience. You have to be REALLY desperate for a fancy new house to sign up for that deal! And 50% to 70% is a more realistic figure to make the deal profitable for the builder, once you factor in transaction and carrying costs.

Guest's picture

Arkansas :)

Guest's picture

The people down the street from me just did this a few weeks ago in Nashville. The people had their home listed, but were having trouble selling it. The builder let them "trade up". The same day the original for sale sign was taken down, the builder came and put up their for sale sign.

Guest's picture

I don't think you're dumb at all for thinking this, I think it's a great idea! Seriously, I have never thought about this before...what a new, fresh idea!

Guest's picture

In my old neighborhood, back when it was really booming, some folks did similar (this is a simplified description): Developer wanted their house, they wanted to stay in the neighborhood, so 1) Developer purchased new home, 2) Sold new home to Homeowner, and 3) Purchased Homeowner's old home. There no incentive from the homeowner's point of view in doing a trade, versus a sale -- unless the home has appreciated more than 250k / 500k, individuals sell their principal residences without federal tax -- but the developer in these instances could sometimes qualify for preferential federal tax treatment, or do a second deal with someone else who could (as a 1031 exchange).

Guest's picture

Nothing is moving quickly in our town. Homes are on the market for months. Even modest houses are being cut up into smaller rental units. Crazy. With area job cuts, potential buyers are leaving.

Guest's picture

1961, Des Moines, Iowa

My parents bought a new house, and the builder/realtor bought their old house, and credited the sale price on the new house they bought

Guest's picture

All I can say is great discussion. I love all your thought provoking posts. It takes great genious to say hey what about this? And why the hell not?

Guest's picture

I think this concept is very good, but in practice is very challenging. This could be over-simplified very easily. I'm a real estate investor and am here to tell you that the holding costs of real estate, with or without a renter, are vast and can be quite costly over the long run. That doesn't necessarily mean that the builders can't make out like bandits over the long run, but it's difficult to quantify and plan for the upkeep of a house or many houses that they would have to hold in the meantime, let alone the cost of property management if they choose to rent them, which I see as the only financially viable option with them being able to do a program like this. Your mileage may vary, but this is my take. For what it's worth, I'm also a mortgage banker and get to see how long houses sit on the market day in a day out as well. It's beginning to pick back up, which is certainly positive.


Guest's picture

First of all, most people don't buy homes from homebuilders; they buy them from other homeowners. So this would only work for a small percentage of people.

Second, home-builders are just that - if they wanted to flip real estate or sell homes they'd have become investors or realtors. Why would they want to completely change and expand their business model just for the "opportunity" (plus lots of risk) of taking your old house off your hands?

Third, a homebuilder wouldn't have an easier time of selling the property than the owners themselves (especially through the use of realtors). And why on earth would anybody sell their home to a builder for less than the market value when they can sell it to somebody else for the market value? (No matter what they'd always be getting a worse deal from the builder than they could on the open market,).

At best, your proposed system would simply add a middle man which would ultimately increase home prices for everyone.

Paul Michael's picture

no-one would trade-in a car, because they can get more for it selling privately. And as several people have commented, this has already been done. It's just not common...yet.

Guest's picture

This could possibly work in areas where new homes are being built near existing homes and city centers. It wouldn't work in the well-developed areas. Our neighborhood was built in the 1950s. To buy a new home, we'd have to drive 30-40 minutes away from the areas where the jobs are.

Guest's picture
Russell Abravanel

We are never out of money as long as we have ink and paper!

Guest's picture

Right, but isn't the obvious place for this type of financial exchange within the instituions standing to make the most from the trades... the banks. Why can't banks see when their mortgage holders are over their heads and steer the problem debters to more affordable properties in their foreclosure portfolios? By this method only the top end houses will go on the traditional market and numerous foreclosures will go in the black instead of the red.

Guest's picture

I thinks it is an excellent idea. We plan to do just that to buy a new home. I can't believe all the naysayers here. We have to do something, and take some risks. If we just sit back with folded arms while shaking our heads, we will continue to sink deeper.

Guest's picture

OMG ,I have been looking for something like this for 3 years now , i hate my house ,love my location & i also thought about walking away , but its a thought ... Really hope this become a reality. it would save the housing market ...