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
I came across this article and discussion because we are currently selling my a house and after about a year have entertained a few offers. All have included a sellers subsidy of closing costs.
For example, the house is listed at $168K and we received an offer for $168K with a $5K sellers subsidy ($163K net). Call us old fashioned but paying the buyers fees rubs us the wrong way. Our counter was $165K with $0 subsidy. The new offer was $170K with $5K subsidy ($165k net). Still not interested in paying closing costs so we re-countered with $165 with $0 subsidy.
Why would the buyer insist on the $170K / $5K ?
Red!
You are blowing it!
Don’t be stupid, sorry “silly” doesn’t go far enough.
Why do you care if it is $200,000 with tens of thousands back? Focus on the NET! Ignore your gut.
It also sucks that you are likely doing this fsbo and not getting advice.
Why do some people need it? Nobody told you?
If one buys a $100k house with a 5% loan and 2% in closing costs, they have two options.
1) offer $100k and bring $7k to closing
2) offer $100k, ask for $2k in closing costs and bring $5k to closing.
Same $ for the seller. Yet buyer doesn’t have to bring 40% more cash (ie deal breaker)
So counter the NET you want and ignore how it is written (just watch out for the appraisal)
Frank
Hi Frank,
Amazing resource. Came across this article after I got a little discouraged when the seller did not accept our offer. They are asking 169k after lowering over time from 189k to 169k because of no offers, seller is supposedly motivated it’s an estate sell.
Based on agents advice we offered 164k and asked the seller to pay 7k towards closing cost and points. They did not accept we are currently waiting for a counter tomorrow!
Also the other issue is that I could not qualify for an FHA because the taxes on the property are 4800 which is too high for the required ratio…
But I did qualify for the USDA rural loan, which is good. However with the taxes factored into the offer we submitted I felt comfortable…Now I worry about them countering and asking for the 169k which would send my mortgage well over 1300per month.
What do you advise? Should I counter back or just wait it out? I know that they have not had any offers at all been on the market since April and they already lowered 19k. Thanks in advance.
Hey Mel
You have an agent right? I can’t tell you what to do.
I doubt they will come back at full list. Take it one step at a time.
If the issue is the closing cost help, maybe you can change your offer and make it lower with no CC and reserve the right alter the ratification to change the offer and cc, while freezing the net.
Just watch out for the appraisal
Hi Frank.. I found your website while seeking advice on a current contract I am under. I am on the buying side and after a lowball bid I’ve found significant septic issues which prompted my agent to inquire with the seller. They have offered 6k at closing or 6k off the sell price. This is half the projected cost to replace the septic. Since I plan to go 203k I can finance the cost into the purchase along with other property repairs and upgrades. My question is.. Where does the 6k mean the most to me? The seller nets the same but if I get 30 in streamline or upto 50k in a full 203k on top of the sell price where is the 6k better served? Thank you.
Given a frozen net, I would prefer for it to close as high as possible. I didn’t really follow the rest of your question. Sorry
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If the seller is asking $169900 for their house and I offer $169 and the seller pay all the closing or $162 and I pay my own closing are these the same things? Is either more beneficial to the buyer?
Hi, there.
I heard that sometimes realtors can help buyers to pay closing costs. How to negotiate that with a realtor?
Thanks
You are always free to negotiate up front what your Realtor will be paid. But if you sign a contract for X% and then a day before closing demand $1,000… sure they COULD give it to you, but they would not be contractually obligated to do so. There are agents that discount and rebate. Nothing wrong with that, but make sure to read my posts on that topic.
YES I BOUGHT A HOME AND SELLER SAID THEY PAY CLOSING COST NOW I AM TOLD I HAVE TO PAY SOME OF THE CLOSING COST THEY SAY THEY ONLY PAY UP TO 2500 WHEN I WAS TOLD THEY PAY AND IT EVEN ON THIER ADVERTISMENT ON CLOSING COST I SUPPOSED TO GO OVER AT 3 TO SIGN IS THIS RIGHT