Sellers Should Pay All Closing Costs
Ok, this is kinda tricky to explain, so bear with me.
I feel strongly that ultimately the seller should pay for all (actually “most”) closing costs. But not in the way that you might be thinking. And this type of post will lead to the 101 hyper technical “but what if” scenarios and counterarguments.
I’m not talking about “Negotiate strongly and beat down the seller by getting closing costs thrown in, heck this is a buyer’s market!”
I’m talking about “The seller should care about their NET.” Once the net is established, go back and ask if the price can be adjusted (INCREASED) to include closing costs.
Example: $500,000 with 0 closing costs vs $510,000 with $10,000 back.
Why?
The higher the recording closing price, the better for the buyer. Ie $510,000
1) In the short term for comps: The higher it records on the county records and the MLS the better it is for “comps.” In other words it helps the next similar unit close for higher, which is better for the buyer (ie more of the cheesy “instant equity”).
Note that the MLS DOES show the seller subsidy (closing costs paid by seller) in Virginia, DC, MD, but
a) not everyone sees it (even though FranklyMLS nets out all closing costs when showing sold prices).
b) not all appraisers will adjust 100% for it (thus helping the next unit appraise for higher).
2) Better loan.
For some people adding back in 2% in closing costs, can help people jump from a 15% down loan to a 20% down loan, thus dropping the rate significantly.
3) In the long term: since the county records do NOT show the closing costs, this helps the buyer when they sell the unit in a few years. Many do-it-yourselfers and data hounds will say “well you bought it for $510,000… therefore” instead of “well you bought it for $500,000… therefore.” I would rather make it look like I spent more (and in essence, with all the closing costs, you really did spend $510k, so why not have people see that number?).
Common counter-arguments:
1) Some will say this artificially inflates the marketplace and might lead to a subsequent crash. Answer: I’m talking about a benefit to the individual buyer. A buyer agent’s job is to do what is in the best interest of the client, while being legal.
2) Taxes will go up. Yes, perhaps. Maybe $50 a year, big deal.
Buyer tip: See post on NOT using Tax Assessments to value a home)
Seller tip: Since some buyers DO use this, the HIGHER the tax assessment the better, so think twice before fighting to get it lowered, see post)
3) Seller might have to pay the commission on the seller subsidy.
Yes, this might be the case. The buyer can offer to pay the difference. Or skip the idea of asking for more seller subsidies after the fact, and ask for it up front in the initial offer.
Things to watch out for:
1) Don’t make the seller subsidy too high. This isn’t free money. Sometimes a lender will say “sure we can use up 3% or 4%”, but that defeats the point. Don’t start buying points if you weren’t already planning to.
2) The contract reads “Up to X in seller closing costs.” If you put a number that is too high, then the rest goes back to the seller. You can maybe add in your contract “unused closing costs will result in a drop in the contract price, with the same net to the seller.” Or get from your lender the closing cost estimate and leave $2,000 in wiggle room. Also if you need to use up the funds, you can count your home inspection and sometimes up to a year in condo fees. Worst case scenario, you can do a 2-1 buy down (more complex, prepays part of your mortgage) to use up funds.
3) Watch out if you ask for a credit for home inspection items, you don’t want your credits to go so high that the lender won’t allow it.
4) This might get tricky with how the appraisal is handled (it can actually help), but I can go into that next time as that can take a long time to explain.
Sorry if this was a little complex, but it is something that I strongly believe in, and I think most of you will get it. Feel free to add more “well, what if…” I did it for my personal home, and I would do it to help my clients.
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Written by Frank Borges LL0SA
Broker FranklyRealty.com
Owner FranklyMLS.com
Cash photo by emdot
- 11
- February
- 2010
Great post! I like the way you think. I feel certain this is worthy of a re-blog or two.
Frank ~ Great mind! Thanks for sharing your wealth of knowledge.
Frank,
Well said. Every dollar of closing costs is effectively financed by the buyer in at least the transactions in Georgia. It should always be NET TO SELLER that matter. The CHECK at the closing should be all that matters. Unfortunately, there’s lots of people that say, “I ain’t paying no closing costs!” Meanwhile you can take them to the cleaaners on other items (if you represent the buyer).
Frank- informative post for Home Buyers. The key to a Home Buyers success is aligning themselves with a strong buyers agent who “get’s it!” and can help then get the terms they need for the home they want.
Frank,.. tried it for more than a year… stopped doing it 6 months ago.. here’s why.
1) We started to come across sellers who refused to change the sales prices after the contract was signed off on by both parties. We almost lost a deal over it. We even offer to eliminate commission on the increased difference.
2) Appraisals are tighter than ever and the extra closing costs can put the property price over the top. We had that happen with a condo and the deal fell almost fell apart. The buyer had to borrow money (after our client refused to meet half way and reduce sales price).
3) Most Mortgage brokers don’t get it.. they tell buyers to ask for closing costs up front saying something like “Just have the seller pay closing costs”. The mortgage industry ignores the fact that it effects a sellers bottom line (it makes the mortgage brokers job easier selling the loan) so the pressure of writing the contract with closing costs included up front is planted in a buyers mind. If we as realtors try to change that buyers mind (and roll in closing costs after the contract is agreed to by increasing sales price) after buyers have met with the mortgage broker we’re met with resistance. The 1st time buyer thinks they are now paying the closing costs (rolled into their mortgage). They don’t understand that if we roll in the closing costs at the start, the seller will just increase their bottom line to compensate for the closing costs. I know this concept may sound ridiculous but it’s true. It’s a question of semantics.. but it happens all the time.
To sum it up, I agree with all your points (including one you missed…it streamlines the offer and gets to the heart of the bottom line price), but after trying it for more than a year we gave up.
Frank – love #2 under things to watch out for. You always have a unique point of view and a new way to get the best deal for the client. Maybe I’m too honest, but I would rather put it up front then wait until after the initial contract is ratified. To me the only way it makes sense to wait is if you get a higher appraisal value in and realize that you have some more room.
Having a 20% down conventional loan benefits the sellers as well, since it eliminates the need for an FHA appraisal process. Given that currently there are few alternatives to 20% or FHA, and that most people are pushing it to have 20% down, it only makes sense to have the seller smooth the transaction by folding the closing costs into the price.
I’m surprised that seller’s would care about more than their bottom line net. Sure, you want those closing costs to be minimized and realistic to make sure it appraises, but other than that, I don’t see why a seller would object. Although I’m not sure why you’d go for the bait and switch rather than asking for closing costs in the original offer.
As a listing agent, when the seller is paying buyer closing costs I always write an addendum stating that the commission will be based on the sales price minus the seller-paid closing costs. This makes me a hero in the seller’s eyes, and doesn’t actually cost me much. Besides, that’s only fair.
I think this sounds great from a buyer’s perspective, but getting a seller to accept is not always easy.
Sure the seller should mostly be focusing on what their net sales price is, but when they agree to pay a large portion or all of a buyer’s closing costs they are then forced to shoulder the risk of the property not appraising. This is a huge issue with how tight the appraisals have gotten.
If the appraised value comes back low do you think the buyer is then going to ask the seller to lower the sales price to meet the appraised value and then also agree to lower the seller subsidy to give the seller the same net as before? Not in my experience.
Hey Frank, just saying hello and thanks for the blogs and the franklymls site. I have found them to be very helpful and informative!
Frank,
I can see that where you’re selling homes, it’s pretty pricey, so I can understand your commitment to your clients and all the things you do for them. I live in Houston, and the prices (at least what I am looking at) are around 130s-150s. What should I be expecting from a Realtor in regards to their level of commitment and how much extra they should be doing when I know that their commission isn’t as large as yours would be?
Thanks.
Brandon
I’m with you on this one. I try and get my buyer’s closing costs paid by the seller, and if they aren’t willing to do so, then I try to see if we can net the seller the same amount will still getting them to concede closing costs for the buyer.
We have our home on the market and have been approached with this idea. We understand it and are ok with it as sellers. My question is how much-if any of the closing costs can you write off on your taxes?
You would obviously have to ask your accountant, but I know of no tax benefits for the seller for doing this. Whether the price is $10k lower or you offer $10k back, the IRS should look at the NET. And the closing costs are expensed by the buyer, even though you gave money to pay for it.