I’ve got a basic question regarding closing costs and negotiating selling price.
Why would a Seller agree to pay your closing costs instead of just lowering the sale price of the property? Maybe I’m just thinking about it wrong, is the idea that after your offer is accepted that the Seller will agree to pay closing costs as a concession for something else, like repairs?
No ?'s are dumb, well some are, but this one isn’t. We all asked ?'s coming up. As a buyer you have 2 choices. You can pay the closing costs at closing whereby you write a check for the amount, let’s say it’s 3k. Or, the seller can credit you the amount you need for closing costs, which allows you to finance your closing costs so that you don’t have to come up with another 3k in addition to your down payment monies. A quick example:
Contract price: 100,000
Actual purchase price: 97,000
This leaves: 3,000 for closing costs, which will move to your side of the HUD at closing, thereby lowering the amount you need to bring to closing. Make sure the spread is enough to cover the costs though, your closing agent should make you aware of the number before closing.
I usually set the # at 6k and say the seller will credit me UP TO 6k for closing costs. What I typically will do is to come to an agreement on the purchase price and then tell the seller I want to add 3-6k on top of that for closing costs and have them credit me 3-6k at closing for closing costs. That way the purchase price that you offer looks like less on paper, because if you offer 103k and say credit me back 3k the first thing they see is the 103k purchase price and you have to go in and explain it’s actually 100k.
The whole idea of the seller paying your closing costs is so that you can finance them and not pay out of your pocket at closing. Many lenders will just go ahead and do this for you if you ask, but some stipulate that it has to fit into the LTV, DTI, etc. Just ask.
...the Seller will agree to pay closing costs as a concession for something else, like repairs?
This is certainly something that could be negotiated. If you look at the house and it needs 5k worth of work you could offer to the seller to pay your closing costs in lieu of repairing the 5k worth of work.
Sellers will almost always drop the price instead of paying closing costs, and will usually prefer to do so…
The closing cost thing is for retail buyers who are short of cash. If they pay full price and the seller pays closing, the buyer can come to the table with a lot less cash. If they are OO, they might be able to close with no cash at all.
What is really happening is that the closing costs are getting rolled into their mortgage, because they get a mortgage for the full purchse price.
Seller paid closing costs essentially comes down to stealing from one pocket and putting it money in the other. Typically the only new costs incurred from the seller due to closing costs being paid are title, and transfer tax because both of those figures are based on a certain percentage of sales price meaning if the sales price gos up the numbers get higher.
I try to get the other party (seller or buyer, depending on the transaction) to pay as much of the closing costs as possible. Once we’ve agreed on a price, I use my own contracts that are based on the local Realtor contracts that have been modified to help reduce my costs and risks . One of these mods is for the other party to pay most of the closing costs. I’ve had several customers run the contracts past their lawyer and only one lawyer has ever said anything. When that happened, I proposed we split the cost, resulting in me only paying 50% of a cost that I would “customarily” pay 100%.
I don’t sell my property very often. In the past three years I have only had two sales where the buyer asked me to pay closing costs. I agreed to pay the closing costs if they were added to the buyer’s purchase price. Both times, the buyers accepted my counteroffer.
My last flip I received an offer where the buyers wanted $7K in closing cost credited, and were getting 100% financing. That was a very scary offer to me. Said they didn’t have any money at all.
Found other buyers
The biggest worry about credits is getting the appraisal to come in for the higher asking price due to the credits. Especially in this market, you need to be careful.
If you’re going to add credits to the purchase price you certainly have to keep in mind that is going to require a higher appraisal. It’s been my experience though when you have a buyer and a seller agreeing on a price the appraiser has a way of making that appraisal come in right at that number.