Purchase Offers

saltidawgFebruary 10, 2012

I have bought and sold numerous homes over my life, including 24 years in the US Navy submarine Service with frequent moves.

In no case did a purchase offer that I made or received include points back or closing cost side deals - it was simply a $ offer with some contingencies such as selling my old home or obtaining a mortgage at X%, etc.

I have been in my current home for 22 years so I feel out of touch on this matter at this time.

I watch some number of TV reality shows following couples looking for a home to buy. To make up an example of what I am seeing frequently is:

Asking price $200K

Offer $195K with seller paying $5K in closing costs.

How does this compare to a simple offer of $190K?

As a buyer and a seller I would have guessed that if Appraisal versus selling price was a concern, I'd rather see the "price" be $195K.

I would just like to understand the rationale and also would like to know if it is common to see offers structured to include a number plus closing costs?

TIA

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kelpmermaid

The difference is in the amount of cash the buyer needs to put up to close.
I would think the lower price would be easier to hit for appraisal purposes.

    Bookmark   February 10, 2012 at 9:38PM
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saltidawg

Yes, I agree. I should have said, " As a buyer and a seller I would have guessed that if Appraisal versus LOAN AMOUNT was a concern, I'd rather see the "price" be $190K.

    Bookmark   February 10, 2012 at 9:45PM
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cas66ragtop

To the seller, an offer of $190k is better than $195k plus $5k closing, because that extra $5k on the purchase price means you pay extra realtor commission. Sometimes there is no way around that because the buyers may still need the closing costs in order to get the loan.

    Bookmark   February 10, 2012 at 9:48PM
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DLM2000

Saltidawg you are so right - it's a whole 'nuther world out there in the home buying/selling game. We've been in our house almost 21 years and are trying to learn the new tricks, too, so look forward to replies. I hope you don't mind if I ask a tag-along question or two.

Is there any advantage for the seller? Does the payout by seller for closing costs (or anything else) have any impact on gains from the sale?

Are there other 'creative' ways to make numbers more workable for buyers or sellers - legal ways?

    Bookmark   February 10, 2012 at 9:51PM
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ncrealestateguy

Why worry so much how the numbers are arranged above the bottom line? Pay attention to your net gain at the end. As long as you hit this goal, why worry about how it is all arranged?

    Bookmark   February 11, 2012 at 7:54AM
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writersblock

>I watch some number of TV reality shows following couples looking for a home to buy.

There's no more reality on an HGTV reality show than there is on any other reality show. I wouldn't pay the least attention to what they say.

    Bookmark   February 11, 2012 at 9:35AM
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saltidawg

"Why worry so much how the numbers are arranged above the bottom line? Pay attention to your net gain at the end. As long as you hit this goal, why worry about how it is all arranged?"

I tried to explain that I had bought and sold many times in many different states - but not in over twenty years. Your saying "... why worry about how it is all arranged?" in response to a straight forward and sincere question would certainly get you fired were you my Realtor.

I do not see what difference the two offers would make to a seller and thus I asked the question. I get it that the "net gain", to use your phrase, is the same. (Net cost?

I don't think dlm2000 and I are going to get an answer.

Should I decide to sell and buy in the future, I'll get the answer at that time.

    Bookmark   February 11, 2012 at 12:23PM
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jboling_gw

I've always been curious about the rationale behind this and how it works, too. I've been through numerous real estate transactions and never encountered this. I'm familiar with the buyer rolling his closing costs into his mortgage loan amount, but not "getting it back" from the purchase price. Does the seller arrive at the closing with the buyer's closing cost cash in hand? And why make that arrangement part of the purchase price, and not just part of the negotiation? Having a lower purchase price in a deal that includes a closing cost negotiation benefits both the seller and buyer for property tax and real estate commission purposes. I don't get it, and I thought I was pretty smart with real estate deals. :-)

    Bookmark   February 11, 2012 at 12:51PM
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terriks

To the seller, an offer of $190k is better than $195k plus $5k closing, because that extra $5k on the purchase price means you pay extra realtor commission.

The seller can exclude closing costs paid on the buyer's behalf from commission.

    Bookmark   February 11, 2012 at 1:47PM
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brickeyee

"Your saying "... why worry about how it is all arranged?" in response to a straight forward and sincere question"

This is actually the correct answer.

Stop sweating details and watch the bottom line.

"...would certainly get you fired were you my Realtor."

Glad I have never had to work for someone so shallow.
You do not seem to understand how it all works.

Why didn't you ask your agent?

They are working on your behalf.

    Bookmark   February 11, 2012 at 3:16PM
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susanjn

"You do not seem to understand how it all works."

Precisely. That's why he asked.

Terriks, are you saying that the seller would pay commission on $190K, or that he would deduct $5K from the commission on $195K.

It seems to me that a person has to understand how it's all arranged in order to understand the implications to the bottom line.

Why has this question raised so many hackles?

    Bookmark   February 11, 2012 at 4:18PM
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graywings123

I agree with the women and the OP - if for no other reason than intellectual curiosity, I would want to know. And if my money were involved, you can bet I would want to know. I want to understand the numbers and I want to understand why the contract is configured as it is. Years ago when I was selling a house, I caught a substantive error in the contract that my agent missed.

Any real estate agent who dares say to his client "Why worry so much how the numbers are arranged above the bottom line?" doesn't belong in the business, IMO.

    Bookmark   February 11, 2012 at 5:48PM
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linda117117

Saltidawg, it is called a sellers concession. The actual offer to the seller is $190K. The purchase price is bumped up to $195K to cover $5000 of the closing costs for the buyer. In a market when it is so hard to get things to close, most sellers are more than happy to agree to this to get to the closing. It doesnt cost the seller any more except a transfer tax which is approximately $4 per thousand and most attys will add a clause to the contract (i suppose in states where attys are not used, agents can add it)where the buyer will pay the extra transfer tax.

The only stipulation is that the house needs to appraise for the higher amount.

As for commission, for all those people that think agents push this for more commission, the difference between 190k and 195k at 6% is $300, however, the commission is based on the actual sales price, NOT the price with the concession. That would be about $50 or less to an agent.

    Bookmark   February 11, 2012 at 9:02PM
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marie_ndcal

Hope you get the answer. You mentioned the submarines? Hubby was in during Korea, when where you in? just curious.
If you are not working, you might see if your local adult education school is offering RE courses, and take some to get additional education to help you out. I did for awhle many years ago, and really enjoyed it, and found out that was not the job for me.

    Bookmark   February 11, 2012 at 9:46PM
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ncrealestateguy

OP wrote"
"Offer $195K with seller paying $5K in closing costs.

How does this compare to a simple offer of $190K?"

Again, it is the same offer as far as how much you would net. There is nothing more complicated with this contract than a "simple" contract w/o seller paid closing costs.

OP wrote:
"I would just like to understand the rationale and also would like to know if it is common to see offers structured to include a number plus closing costs?"

The rationale is that most buyers in this price range need some assistance in having to bring cash to close for the closing costs. Most sellers are willing to "pay these costs" because buyers are hard to come by. Again, the NET amount to the seller does not change, except for the incidentals of some prorated expenses as mentioned above... about $300 worth. Not a bad price to pay to get a buyer to closing.
It is VERY common here for buyers to ask for seller paid closing costs. Above about $350,000, it becomes less and less of an occurance because buyers in this price range tend to have more disposable cash that can be bought to closing.

    Bookmark   February 12, 2012 at 8:13AM
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pachick

OP, we are under contract with a bank-owned property now. They are paying 3.5% of the sales price in closing costs. This allowed us, the buyer, to put that additional 3.5% into the downpayment. Because we had that additional 3.5% in the downpayment, we were able to obtain more funds for our renovation loan.

We previously had a verbal offer accepted with a FSBO. We had a full price offer plus about $8k, with the $8k going to closing costs. This would have netted the same for the sellers, but would have allowed us to get into a conventional loan instead of an FHA loan with higher PMI. (The owners accepted a bigger offer before we could get a written offer in; they ultimately came back to us as their back-up offer, but we were already under contract with our current house.)

So as a buyer, seller consessions have allowed us to maximize the effect of our downpayment/closing costs (and now renovation funds).

    Bookmark   February 12, 2012 at 9:52AM
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terriks

Terriks, are you saying that the seller would pay commission on $190K, or that he would deduct $5K from the commission on $195K.

Commission is only paid on the $190K.

    Bookmark   February 12, 2012 at 10:42AM
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brickeyee

""You do not seem to understand how it all works."

Precisely. That's why he asked."

And when the OP was told not to worry about how the nunbers are arranged, replied:

"Your saying "... why worry about how it is all arranged?" in response to a straight forward and sincere question would certainly get you fired were you my Realtor."

Sure looks like someone who asks questions and then goes off on reasonable replies.

    Bookmark   February 12, 2012 at 12:37PM
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weedyacres

I don't usually get involved in GW catfights, but the OP is wanting to understand the psyche of someone that would propose a $195K price with $5K in seller-paid closing costs as opposed to a $190K selling price. As a seller, he's completely indifferent as to "how it is all arranged" and he understands that it makes no difference to his bottom line.

Since it doesn't matter to him as the seller, he's trying to understand why it matters to the potential buyer. Why would they propose something more complex instead of just the straightforward numbers? If he understands this, it might give him insight into the buyer's psychology and enable him to do something that's more appealing to them.

A perfectly reasonable question. "Don't worry your little head about it" is not a reasonable reply (and from NC, who does usually offer reasonable replies) :-).

    Bookmark   February 12, 2012 at 8:26PM
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terriks

Isn't it obvious that buyers make this kind of offer either because they don't have enough cash of their own to close, or they want to hold on to as much of their cash as possible for various reasons: cash to have on hand for redecorating, repairs, etc.

    Bookmark   February 12, 2012 at 10:30PM
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ncrealestateguy

Weedy,
That is not the words I used nor was it the tone I used.
Here is the OP's question... "I would just like to understand the rationale and also would like to know if it is common to see offers structured to include a number plus closing costs?"

This has been answered by several responses. Hopefully, the OP now understands the rationale of buyers asking for seller paid closing costs. Usually the most logical answer is the correct one.

    Bookmark   February 13, 2012 at 6:58AM
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Billl

"I would just like to understand the rationale and also would like to know if it is common to see offers structured to include a number plus closing costs? "

How common this is really depends on the market and price point. It is VERY common in "starter homes." Most first time buyers struggle to come up with a significant down payments and would like to avoid upfront closing costs. Structuring an offer so that they have as little out of pocket expense as possible is a big positive for them.

On the flip side, anyone bringing considerable cash (or equity in their existing home being sold) doesn't have much/any reason to structure the deal that way.

From a sellers perspective, you might have some minimal costs but the real concern is the appraisal. The buyer is structuring the purchase so that they bring as a little cash to the table as possible. If the house doesn't appraise for the higher amount, it will likely scuttle the deal entirely. For that reason, it is thought of as a slightly riskier transaction from the sellers view.

    Bookmark   February 13, 2012 at 1:21PM
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jboling_gw

I think everyone understands that buyers sometimes need help with closing costs. If I may continue to beat a dead horse :-), I think what some of us don't understand is how these costs are paid by the seller when part of the offer. Using the PO's scenario, has the buyer arranged a $195,000 loan for the house, but $5,000 is going toward closing costs and not to the seller? If that is the case, why make this arrangement part of the offer? Why not offer $190 and have the closing costs rolled into the mortgage amount, since the bottom line is the same to the seller? If the buyer can't get a loan in that amount, is the seller then expected to bring out-of-pocket cash to closing to pay those costs? I haven't seen this explained yet.

    Bookmark   February 13, 2012 at 7:39PM
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linda117117

.Jboling, only in writing is it actually paid by the seller. The buyer IS actually taking out a mortgage for the extra $5000 to cover the closing costs. The seller has to agree to it because it does "weaken" the strength of the offer. 1. The house has to appraise for the higher amount, and 2. The buyer has to qualify for the higher amount. It appears to be a $195,000 offer on paper with the seller paying $5000 towards closing. (same as a 190k offer, except with a 195k offer, there is 5000k the buyer can use for closing costs) The reality is, the buyer is paying the closing costs over the length of the loan.

    Bookmark   February 13, 2012 at 11:45PM
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jboling_gw

Thanks, linda. That's what I figured. In my experience with numerous real estate transactions during my life, though, adding costs to the loan has always been a personal arrangement with the mortgager, not part of the offer. So, it seems like this strategy is just an attempt to make the offer "sound" better. If a buyer made an offer like the OP's to me, I'd probably roll my eyes and say, "Let's just sign for $190,000, okay? And you can talk to your mortgage company about the loan you need." :-)

    Bookmark   February 14, 2012 at 8:38AM
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Billl

"If a buyer made an offer like the OP's to me, I'd probably roll my eyes and say, "Let's just sign for $190,000, okay? And you can talk to your mortgage company about the loan you need." :-)"

And then you would probably lose the sale. Most mortgage companies will not just "roll the costs" into the mortgage. I know, I know... the math is the same, but it isn't worth arguing about. They just aren't going to do it. They want the house to appraise for the full sales price including and concessions from the seller. They want to see those concessions clearly spelled out on the closing documents.

    Bookmark   February 14, 2012 at 9:28AM
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jboling_gw

billl, I haven't bought or sold since 2007 and I know mortgage companies are tougher now, but in my area, including costs with the mortgage is common as long as the down payment and appraisal are adequate. But lately I've heard of mortgage companies making nonsense decisions, so you're probably right about them refusing to admit that with either scenario, the closing costs are still being rolled into the mortgage.

    Bookmark   February 14, 2012 at 9:43AM
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