Real estate: Is there a discount? This is how builders negotiate a price reduction

Building a house is truly an expensive undertaking – this has been truer than ever since the turnaround in interest rates.

Real estate: Is there a discount? This is how builders negotiate a price reduction

Building a house is truly an expensive undertaking – this has been truer than ever since the turnaround in interest rates. This makes good cost management essential. At the same time, builders should not save in the wrong places. A risk-free method to reduce the financial burden is the so-called cash discount. This is a percentage discount on the purchase price. In contrast to a rebate, a cash discount is not linked to quantity, but to time: the invoice amount only goes down if consumers pay within a certain period of time. Cash discounts are an attractive option for customers to save money. For companies, they are a good way to strengthen their own liquidity.

Cash discounts are usually particularly popular in the business-to-business (B2B) space. But private customers can also benefit from the price reductions. The prerequisite for this: good negotiating skills. "Discounts are purely negotiation successes," says attorney Holger Freitag, attorney of trust for the Association of Private Builders (VPB). "Their distribution depends on the market situation and the interest rate environment." An oversupply of construction work and high interest rates are typical drivers of such agreements. At least the latter is currently the case, so a good reason to check with your own contractor to see if there is a discount.

Normally, builders have to pay their craftsmen's wages when they have accepted their work and a verifiable final invoice is available, explains Freitag. If there are no defects, the wages are to be paid without deductions, unless otherwise agreed. Accordingly, invoices without a discount often contain a passage such as "Payable within fourteen days without deduction". If a discount is granted, it says instead: "Payable within 14 days net without deduction. If payment is made within five days, we grant a 2 percent discount."

Basically, there is no statutory discount regulation and accordingly no right to the price reduction. Sellers can decide for themselves whether and if so, how much discount to grant and for what period of time. According to Freitag, a deduction of between two and five percent of the invoice amount is usual. The discount can also be staggered: Then, for example, there are five percent for immediate payers and three percent for payments within the first ten days. The period usually begins with receipt of the invoice - unless otherwise agreed.

Letting a discount period pass unused can be quite expensive. Although there are no actual costs, the lost benefit is referred to in business administration as opportunity costs. This is illustrated by an example calculation: Strictly speaking, the payment term that suppliers grant their customers – around 30 days – corresponds to a supplier credit. An agreed discount of three percent for payment within ten days can be interpreted as the interest rate for this loan. Anyone who now fully utilizes the payment term granted and waives a three percent discount for a further 20 days of supplier credit, implicitly pays his supplier interest. Extrapolated over the year, for our example this means an annual interest rate of around 55 percent ((discount rate = 3 percent × 365 days) / (30 days – 10 days)).

Anyone who has been able to nail their contractual partner down to a cash discount should definitely record this in writing. Craftsman contracts are not subject to any formal requirements, as lawyer Freitag explains. However, in the absence of a fix, there is a risk that there will be disagreement later on about crucial details such as the cash discount period. Other contracts, such as a consumer construction contract, which is concluded when a new building is built or for major conversions, are at least in text form anyway.

All detailed questions should then be clarified in the contract itself: on which account should the money end up, when does the payment period start, etc. In addition, the contracting parties should agree when the payment is deemed to have been made, advises Freitag. Otherwise, it can become controversial if a builder settles the payment when the discount is due, but this only ends up in the builder's account the day after due to the bank's processing time.

Partial payments are a special case. Here the invoice amount is divided into several payment terms. Unless otherwise agreed, customers must settle each partial invoice within the respective payment period. If you are in arrears with a single partial payment, this does not mean that the entire discount deduction expires. It continues to exist for each partial invoice, explains lawyer Freitag. However, contractual partners can incorporate clauses whereby the discount deduction expires if consumers pay a partial invoice too late. In any case, the conditions must be recorded in writing.

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It gets exciting when it comes to defects. Builders have the right to withhold the contractor's wages - twice the amount of the removal costs by a third-party company. The contract should therefore state whether the discount also applies if part of the invoice remains unpaid due to defects. "Without such clarifications, full payment is fundamentally a prerequisite for entitlement to a cash discount," says lawyer Freitag. This can have disadvantages for customers: if you pay the full bill, you lose your leverage over the company. It can then be more difficult to successfully request rectifications.

This article first appeared on Capital.

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