How contractors can use buydown fees to boost home improvement sales

If you’ve looked at partnering with a finance company, you’ve probably heard about dealer fees or contractor fees. These fees usually fall into three categories: required fees, promotional fees, and rate buydown fees.

Required fees are charged with every loan — think of them like a service fee. Not all lenders have them (we don’t), but you may come across them. Promotional fees allow you to offer your customers incentives like same-as-cash financing. And rate buydown fees let you offer your customers a lower interest rate for their loan term.

Understanding all the terms and fees that come with financing can be difficult, especially if you don’t deal with them regularly. Our Contract Experience Manager, Laurie O’Leary, has spent over six years helping contractors understand these terms, so we sat down with her to learn more about rate buydown fees.

HOW DO RATE BUYDOWN FEES WORK?

As we mentioned, buydown fees let you offer your customers lower interest rates. You pay a percentage of the loan to the lender, and your customer has less interest to pay over the lifetime of their loan. But why would you want to offer this promotion?

Customers are always looking for the best deal. We offer competitive interest rates at FTL Finance, but that doesn’t mean your customer won’t try to find a better deal before signing the dotted line. That’s where the rate buydown fee comes in.

By paying a 9% fee, your homeowner’s interest rate could go from 16.99% to 9.99%. Laurie notes, “there’s just something appealing” about seeing an interest rate of less than 10% — especially for homeowners who are used to higher rates. If they get a lower interest rate from you, they’re less likely to look for and find a better deal.

GET YOUR BUSINESS BACK IN THE GAME

Have you ever lost a project to a larger contractor who quoted a higher price? Maybe a loyal customer even went with the competition this time. Why would they choose to pay more for the same service?

Laurie’s seen this time and time again throughout her time at FTL. Often the difference comes down to financing. Financing can be more affordable in the short term than paying upfront, and customers are willing to pay a higher total cost for that immediate affordability. If the interest rate the big guy is offering is lower than yours, that’s just the icing on the cake.

It all comes down to the psychology of convenience. Think of it like free shipping. We all know shipping isn’t actually free; the seller is just building the shipping cost into their total price. But you may be willing to pay more for a product because you’re receiving free shipping. Financing is no different; a homeowner may be willing to pay more for a service in the long run for the convenience of financing or a lower interest rate.

While you’re looking at the big picture over time, your homeowner is looking at their bank account today. If you offer financing to your customers with a lower interest rate, you’re now in the game instead of sitting on the sidelines.

IMPLEMENTING RATE BUYDOWN FEES

Offering a lower interest rate sounds nice and all. But how do you make it work for your business? You don’t want to take on this extra expense for yourself — all that will do is hurt your cash flow even more.

The good news is you don’t have to take this on yourself. You likely already have a process in place. How do you handle credit card processing fees? Do you pay them, or do you build them into your prices?

Laurie recommends approaching buydown fees the same way you approach credit card fees: include them in your operating costs. To keep your prices fair, you’ll want to add this to all tickets, including those that don’t use financing. This fee doesn’t need its own line item, either. Just add it to your standard operating fee.

We have a simple formula to determine how much to add to your operating fees:

% of Jobs Financed x Average Dealer Fee = % to Add to All Tickets

We’ve found that contractors who are new to financing finance about 30% of their jobs, and our average dealer fee is 7.5%. Let’s plug those numbers into our formula:

30% x 7.5% = 2.25%

Using this method, you’re not passing an entire 9% fee onto just one customer. You’re spreading it among all your customers, just like credit card fees. And your services still stay affordable for everyone. On a $5,000 ticket, 2.25% is only $112.50. You won’t lose a job over $100, but you could lose a job if someone else offers a better financing option.

GROW YOUR BUSINESS WITH FINANCING

Financing and everything that goes with it can be a lot to take in. We have a whole team at FTL Finance ready to help you understand interest rate buydowns and other ways you can grow your business with financing. Get in touch today to learn more.