Real Estate Closing Costs

[HadEnuff]

It has been quite some time since I've been on the selling side of a residential (non-commercial) real estate transaction.

DW enjoys watching the various real estate programs where folks are buying their dream homes, or their first homes. Watching these with her I've noticed a practice of offering a purchase price "minus closing costs", as opposed to just offering a lower purchase price.

DW and I are now in the process of selling our home, and I haven't seen the offer yet, but my understanding is that it will be in this form. The offer is for the asking price, but seller is to pay closing costs up to a certain maximum amount.

What are the advantages and disadvantages to this approach?

 

[bingybear]

If you are talking about the offer having a sales price with conditions that the seller pays the buyers' closing costs up to some amount, this is not new, but could be more common now. If the agents are working on commission, the sales price is the basis for the commission. That would be a down side. The advantage, the buyer may need someone to pay this amount as I don't think he could borrow it in the loan.

 

[courtjustshan]

It has been quite some time since I've been on the selling side of a residential (non-commercial) real estate transaction.

DW enjoys watching the various real estate programs where folks are buying their dream homes, or their first homes. Watching these with her I've noticed a practice of offering a purchase price "minus closing costs", as opposed to just offering a lower purchase price.

DW and I are now in the process of selling our home, and I haven't seen the offer yet, but my understanding is that it will be in this form. The offer is for the asking price, but seller is to pay closing costs up to a certain maximum amount.

What are the advantages and disadvantages to this approach?

Hi there HadEnuff, I just sold an investment property last week after navigating through this type of offer. My real estate agent presented me with the offer from a person who was getting FHA financing and was going to live in the home. The offer came in at full price with a 5K "give back" maximum for closing costs. So, in essense, it was pretty much the same as accepting an offer for 5K less than asking price with a feww caveats:

1. Depending on the type of financing, they may/may not allow the seller to pay for certain things. This actually worked in my favor as FHA disallowed a tax stamp which save me about $750.
2. Buyers will little down payment money are essentially getting cashflow through this give back to be able to buy the house.
3. Because of the tenuous nature of a buyer not providing all the cash, it seemed to me that the buyer had a real hard time with his mortgage process.
4. This created risk for the deal falling through several times. Fortunately, this was not a million dollar house and the risk was acceptable to me.

My agent was actually against me accepting the offer and waiting for an all cash offer from an investor like myself. I decided to do pay it forward for the neighborhood and sell it to an owner-occupier and take the risk of the financing falling through. The all cash price would have been about the same as the closing costs give back, so it all worked out for me in the end.

I would have done the same thing again.

Also happy not to be a landlord anymore, just not for me.

 

[HadEnuff]

If you are talking about the offer having a sales price with conditions that the seller pays the buyers' closing costs up to some amount, this is not new, but could be more common now. If the agents are working on commission, the sales price is the basis for the commission. That would be a down side. The advantage, the buyer may need someone to pay this amount as I don't think he could borrow it in the loan.

Looking back on my home buying experiences when I was young and cash-strapped, this approach actually makes some sense to me. The buyer is trying to scrape up all of the cash he/she can, to make the down payment, and then on top of that gets hit with all of these closing expenses which the bank doesn't want to include in the mortgage.

The selling party is going to the one with some cash. The seller will pay a slightly higher commission unless negotiated otherwise. At a 6% commission, and capped at 5K, the extra commission is only $300. There are probably other incremental increases, as other taxes and fees are based upon the purchase price. BUT, as a seller, if it facilitates the sale, probably a good deal.

 

[brucethebroker]

I agree with most of the comments so far.
The bottom line is the bottom line, as far as the seller is concerned. Ask your Realtor to give you an estimate of your net with and without paying the closing costs.

It is important not to let emotions get in the way of an otherwise good deal. I have dealt with some sellers who grow indignant that a buyer would ask for closing costs (Nobody paid MINE!!! is a common comment). Keep in mind, as mentioned earlier, most buyers cannot buy the house without the help, and usually, the fixed amount is suggested by the loan officer, not the buyer.

If the bottom line is not to your liking with the costs included, simply counter offer at a slightly higher price. Most appraisers will not balk at that.

 

[jazz4cash]

Agree also with all the comments so far and would add that this type offer is more typical for first time buyers/starter homes. It reduces risk / increased comfort level for inexperienced buyers

 

[HadEnuff]

I agree with most of the comments so far.
The bottom line is the bottom line, as far as the seller is concerned. Ask your Realtor to give you an estimate of your net with and without paying the closing costs.

It is important not to let emotions get in the way of an otherwise good deal. I have dealt with some sellers who grow indignant that a buyer would ask for closing costs (Nobody paid MINE!!! is a common comment). Keep in mind, as mentioned earlier, most buyers cannot buy the house without the help, and usually, the fixed amount is suggested by the loan officer, not the buyer.

If the bottom line is not to your liking with the costs included, simply counter offer at a slightly higher price. Most appraisers will not balk at that.

Of course. what I'm trying to decipher is in what ways this will effect the bottom line.

 

[ducky911]

It is possible that you could in certain situations having a problem with the appraisal being able to cover the higher amount.

 

[SecondCor521]

Of course. what I'm trying to decipher is in what ways this will effect the bottom line.

As mentioned by someone else, there are a number of items that are keyed off the sales price. Around here the big things would be the agent commissions (which is my cynical opinion on why the deal is structured thusly), loan origination fees (not your problem), and title insurance. It might also affect real estate taxes for the buyer after close, but again not your concern.

Most title companies can give you an estimated closing sheet (forget what the form is, but it's a two page HUD thing) and you can look at line item details and see what the big hitters are.

As a seller I mostly cared about maxing $$ to me at closing. Low maintenance buyers were also nice (and the norm for me). Also a similar view on closing timeframe was nice - I didn't want to sell to someone wanting to move in tomorrow or in six months; for me about a month was usually the sweet spot.

 

[HadEnuff]

As mentioned by someone else, there are a number of items that are keyed off the sales price. Around here the big things would be the agent commissions (which is my cynical opinion on why the deal is structured thusly), loan origination fees (not your problem), and title insurance. It might also affect real estate taxes for the buyer after close, but again not your concern.

Most title companies can give you an estimated closing sheet (forget what the form is, but it's a two page HUD thing) and you can look at line item details and see what the big hitters are.

As a seller I mostly cared about maxing $$ to me at closing. Low maintenance buyers were also nice (and the norm for me). Also a similar view on closing timeframe was nice - I didn't want to sell to someone wanting to move in tomorrow or in six months; for me about a month was usually the sweet spot.

I just read the PO, and my contribution to closing costs is capped at 5K, and will certainly get there, so essentially, it is an offer to purchase at asking price, minus 5K, which in our case is a very acceptable offer. Also, buyer has no existing home to sell, which is a great contingency NOT to have, and has been approved for financing. So we've accepted the PO, and now we just have to hope everything moves nicely forward.

Thanks to all for your replies.

 

[Bamaman]

I so!d two houses in the past year. The first one had marginal buyers, and they about drove our real estate agent nuts. We sold the house at list price to the third person that looked at it. They could barely qualify for the mortgage. But for the price paid, I could afford to cut them a check after closing. It feels like everyone is trying to get in your pocket at every chance at closing.

The second sale was to flippers that were real estate agents. A termite letter and a couple of small fees and we were paid in full.

When we purchased our current house 2 years ago as a foreclosure, it was sure nice to pay cash. No appraisal fees or no surveyor fees. We just paid a tax to file with the county and very minimal closing costs. It is charges related to getting a mortgage that get on your nerves.

 

[Amethyst]

A reputable agent told me that in our area, asking for 'closing help' is so common that most sellers simply build it into the price. The industry likes this, since it means a higher commission and keeps prices artificially high.

 

[Amethyst]

My Dad would have stopped the sentence at "chance." And he was right. It is what humans do. Just as animals in the wild will try to steal one another's food.

I It feels like everyone is trying to get in your pocket at every chance at closing.
.