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.
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?).
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.
Make sure to sign up for future posts!
Written by Frank Borges LL0SA
Cash photo by emdot