5 steps to finding out if a trade-in is worth it (© moodboard)Click to enlarge picture

© Moodboard/Corbis

Deals that let you trade in your old home on a new one aren't new. You're simply more likely to see them when builders are having trouble unloading homes. They can disappear altogether when homes are selling well.

Sometimes they're called guaranteed sales plans, says Tom Musil, director of the Shenehon Center for Real Estate at the University of St. Thomas in Minneapolis. When they're offered, it's usually on new homes or a buy-build contract in which you purchase a developed subdivision lot where a builder constructs one of several packaged home designs for you.

Every one of these plans has its own unique twists. Some are a good value; others are questionable. It all depends on your financial picture and on what you're offered:

  • A builder may offer to buy your home directly, or the offer could come from a third-party broker working with the builder.
  • You may be expected to pay for the home inspection or appraisal on your old house.
  • Some builders may offer financing or even require you to use their lenders; others expect you to find your own mortgage.

You'll probably get less on a trade-in than if you sold the property yourself (assuming you can sell it at all in this market). The question is, how much less? Is that discount worth it to allow you to move to a new home or get out of a mortgage you no longer want?

What's your home worth?

The trade-in checklist
The key to assessing a trade-in, say Musil and Rob Strupp, director of research and policy at the Community Law Center in Baltimore, is finding the true value of both the home you're giving up and the one you're buying.

Follow these steps:

1. Brace yourself. If you've had your home on the market and it hasn't sold, you may have priced it too high. Many homes are worth less than what owners paid for them. Expect a low trade-in offer. You may have to contribute money — even tens of thousands of dollars — to pay off your old bank loan in order to sell your house. If you can't make the payments on your loan, ask if your lender will agree to let you sell the house for less than the loan value and forgive the difference (called a "short sale"). Consider whether you're better off staying in your home for now.

Home affordability calculator

2. Find your home's true market value. How much below the market value are you being offered? To find the answer, you'll need to figure out what your existing home is really worth. In other words, if you were to sell it yourself, what might you get for it? Here's how to find out:

  • Compare recent sales. Ask a real-estate agent for comparables (called "comps"), reports on homes similar to yours that sold recently in your neighborhood. Some Web sites list comps (or "recent sales") in your neighborhood (a few are Move.com, Trulia and Zillow), but these sites won't do as comprehensive a job as an agent in evaluating how they're similar to your home. Online estimates of your home's value are useful but should be used in conjunction with a real-estate agent's report. (Editor's note: Move.com is an MSN Real Estate partner. You can search for your home value here.)
  • Analyze the competition. Learn what sellers are currently asking for homes like yours in your neighborhood by exploring real-estate sales sites (you can search listings at the bottom of this page on MSN Real Estate). Read listings in newspapers and sales circulars. Watch individual listings over time. If they stay on the market for long you'll know the sellers are asking too much.

3. Calculate your home's net worth. It costs money to sell your house yourself. Find out how much of the sale price would end up in your pocket vs. what you're being offered on a trade-in by deducting these costs from your home's true market value:

  • Commissions. If you use a sales ("listing") agent, you'll pay a commission of 6% to 7%. Thus, if your house sold for $200,000, you'd net $186,000 to $188,000 — $200,000 minus 6% ($12,000) to 7% ($14,000).
  • Other costs. Most homes need work before a sale, especially in a competitive market. Subtract the estimated cost of any landscaping, repairs, painting and other improvements from your estimated after-commission net.
  • Risk. Trade-in offers are low in part because the builder or broker buying your place is taking a risk on selling it, says Musil. "There is a premium you are paying for someone else to take on this risk," he says. That premium is paid by forfeiting a percentage of the home's current estimated value. But it's worth noting that in a down-trending market, today's current value could be tomorrow's overpriced listing, making a trade-in potentially more attractive.

4. Find the true cost of the new home. Now analyze the second part of the equation, the real cost of the new house:

  • Watch for hidden costs. Thoroughly scrutinize the new-home transaction for homeowner association fees and other costs (for instance, maintenance charges, fees, furnishings or equipment) added to or hidden in the cost of the new home, Strupp says. Find out if you'll be charged for any pre-sale improvements to your old home for the trade-in or if you'll need to pay any commissions. The Detroit-area Forte Group, for example, doesn't charge for improvements or commissions on trade-ins.
  • Know the market. Scour local real-estate listings to compare prices on homes similar to the one you're considering buying.

5. Assess your financing options. Some trade-ins require you to go through the builder or developer for financing. A builder may make money by offering a lower-priced house and jacking up loan fees and interest, says Strupp. And yet, some developers can arrange lower-interest-rate financing, says Musil.

  • Be careful of builder financing. A developer can't require you to use a particular closing agent or lender. Anyone who tries to is violating the Real Estate Settlement Procedures Act. However, a seller can require you to use a particular service to take advantage of incentives like a trade-in deal. If you're being asked to use a specific company, get a detailed breakdown of the fees involved and shop around to learn the rate you could get on the open market. If the developer's lender offers you a 7% mortgage but you can get a comparable mortgage for 6.5% from another mortgage lender, it's possible the developer is adding an expensive mortgage to the true price of your new house. (Use a mortgage calculator, like this one http://moneycentral.msn.com/loan/mortcalc.aspx  on MSN Money, to see what the higher rate really costs. For example, borrowing $220,000 for 30 years at 7% costs $73.12 a month more  — $26,321.71 in total — than the same loan at 6.5%.)
  • Compare APRs. When you're considering borrowing money, don't just fixate on the interest rate. Instead, look at the annual percentage rate, which includes most — but not all — fees. You must receive a truth-in-lending document within 24 hours of applying for a loan that tells you the APR and other loan costs. Compare APRs and any additional fees — for example, a loan-origination fee (typically 1%), appraisal fee or title fee.
  • Rely on a trustworthy bank. A reputable lender is your ally in determining the property's true value, because the bank must make its own determination by ordering an appraisal (which you'll pay for). Solid lenders won't let you borrow more than the real estate is worth. Be wary of lending scams involving an inflated appraisal or a complicated plan to help you borrow more than the house is worth. Avoid expensive, risky, subprime mortgages by asking: "Can my loan be sold to Fannie Mae or Freddie Mac?" If the answer is "no," keep shopping.
  • Consult professionals. Review every aspect of the deal with experts in your market, qualified real-estate attorneys, real-estate agents who have no stake in the transaction and housing counselors from nonprofit agencies approved by the Department of Housing and Urban Development (find them here or call 800-569-4287) or from the National Foundation for Credit Counseling (find a local agency here or call 800-388-2227.)

Finally, says Musil, rely on your own good judgment. "It's the old caveat: If it sounds too good to be true, it probably is."