Closing costs?

jane__nyMarch 8, 2009

Every time I watch HGTV, I notice the buyers are always getting the sellers to cover their closing costs. Why would a seller want to do that? I'm going to be a seller in the near future and wonder what I'm missing. Why would a seller cover the closing costs of the buyer?

Jane

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muddypond

To make the sale. When it's a seller's market, you have buyers willing to do whatever it takes to get the property, even engaging in bidding wars. When it is a buyer's market, you have sellers doing whatever it takes, including agreeing to pay the buyer's closing costs.

Just make sure none of it occurs under the table. You can run afoul of the law that way.

    Bookmark   March 8, 2009 at 8:24PM
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dave_donhoff

To make the sale.

Couldn't make the point any clearer than that!

Dave

    Bookmark   March 8, 2009 at 8:31PM
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linda117117

Jane sellers covering closing costs around the country is not the same as in NY. Closing costs in NY are astounding compared to the rest of the country. (approx 6% of purchase price in NY). What buyers in NY do are ask for seller concessions. This means the price of the house can be bumped up 6% (for conventional financing) to cover closing costs, but that amount is getting financed by the buyer. The house also must appraise for that amount.

    Bookmark   March 8, 2009 at 9:22PM
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jane__ny

Thank you,
Jane

    Bookmark   March 9, 2009 at 12:08AM
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cearbhaill

I paid my buyers closing costs when I sold my home with their offer of full asking price.

They were very young, just starting out, financing 100% of the purchase price and didn't have two nickels to rub together otherwise. If we had not paid the closing costs they would never have been able to afford the home. I think they were nuts to buy it to start with as I am positive they are now totally overextended what with property taxes and hurricane insurance (the reason we left), but that was not my concern.

I was selling a home in a very tough South Florida market, I wanted out, and here was a buyer who wanted in. It was a deal I didn't want to let get away.

And now, 21 months later, that home is worth at least 35% less than what they paid and I am sure they are kicking themselves for buying it as they are totally upside down in it.
I feel a bit guilty about the whole thing, but buying was their decision and they chose badly. That I profited from it was just my good luck I suppose.

    Bookmark   March 9, 2009 at 7:27AM
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folkvictorian

We paid the buyer's closing costs when we sold our Minneapolis house a couple of years ago. The sale price was $220,000 with about $7,000 going to the buyer at closing, so we walked away with $213,000.

There's one important thing to keep in mind, though: the amount of commission we paid to our real estate agent was based on the $213,000, NOT the $220,000 amount -- and this was a handy tip I learned back then from another thread on this fantastic site. Our agent didn't love us for being so smart, but I owe a big thank-you to you other posters out there!

    Bookmark   March 16, 2009 at 5:34PM
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dave_donhoff

Something to keep in mind on that;
$220k-$213k is $7k...
6% of that is $420 (not nothing to the seller... however,)

Half ($210) goes to the listing office.... half ($210) goes to the buyer's agent's office.

Each agent generally gets between 50-90% of their office's fees...

So, the listing agent ACTUALLY saw maybe $100 - $180 "at risk"... in return for getting a much more certain closing (and thus a real commission of ANY amount.)

Weighing the tradeoffs... you'll find most agents quite willing to forego a couple hundred in order to get $3,000 or better (half of half of 6% of $213k.)

Cheers,
Dave Donhoff
Leverage Planner

    Bookmark   March 16, 2009 at 7:15PM
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janjan212

We were on the market for 8 months when we got our first offer. It was a low ball offer and they asked for closing costs to boot. When you are on the market for 8 months in a buyers market, you consider whatever offer you get. We were thrilled we just had something to work with! We countered and recountered, but just on the asking price (original amount was flat out too low to accept) We found out from the buyers agent that they were first time buyers and had little cash to bring to the table. In the end, we got what we needed (our predetermined bottom line) and covered some of their costs as well.

Now we are on the buying end, we also asked for some of our closing costs to be paid. We will have some additional expenses to make this home work for us (which has been on the market for 10 months without an offer)so we wanted to also hold on to as much extra cash as we could. The sellers, as far as we know, had no problem with it as it was never disputed in our negotation process. I too believe they were just thrilled to have an offer to work with!

    Bookmark   March 18, 2009 at 9:24AM
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jane__ny

Dave, I really don't understand what you are explaining. Could you please say it in way that an idiot like me could understand? I'm not sure if you are saying its good or bad. Please, please.

Thanks for all the explanations and reasons. I would like to get my asking price and might negotiate on the bottom line. But Realtor commissions are high. Closing costs for the buyer are high and I can't see paying closing costs which will affect the amount I get for my house. Why not just lower the asking price? Why pay the closing costs?

I've never sold a house before and I'm dreading the whole process. I'm trying to understand, in advance what might come up.

Thanks all,
Jane

    Bookmark   March 19, 2009 at 12:18AM
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setancre

Hi Jane, might be easier if we do an example:

House for sale $500,000. You and buyer agree to sell it for $485,000 and you will not pay any of their closing costs.

Let's say you have no mortgage and your closing costs are $50,000.

The buyers bank will give you a check for $485k - $50k (your costs) = $435k.

In this scenario, the buyer has to put down 20% plus their own closing costs of (let's assume) $15,000. So they have to have $97k (20% of 485k) plus 15k closing costs for a total of $112,000 in cash order to buy your house.

So, to sum up, you receive a check for $435,000 at closing and the buyer has to have $112,000 cash to be able to afford your house.

* * *

Scenario 2:

You instead agree to sell the house at the listing price of $500,000, but you will pay the buyer's $15k in closing costs, along with you own (which still total approx $50k).

You receive a check for $500k - 15k - 50k = $435,000 (same as before).

The buyer however only has to bring 20% of $500,000 which is $100,000 to the closing, instead of bringing $112,000 as in the first scenario.

So you receive the same amount at closing, and the buyer can bring less cash, because the bank is effectively financing more of the total costs (via higher sticker price). This makes it more affordable to a buyer who either doesn't have the $12,000 difference, or wants to spend cash on renovations, etc. In exchange they are paying maybe a tiny amount more in their monthly mortgage for $500k mortgage vs $485k mortgage.

    Bookmark   March 19, 2009 at 10:21AM
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dave_donhoff

Hi Jane,

Dave, I really don't understand what you are explaining. Could you please say it in way that an idiot like me could understand? I'm not sure if you are saying its good or bad. Please, please.

Oh c;mon Jane... you're no idiot ;~)

Setancre did a very good explanation, I think.

I would like to get my asking price and might negotiate on the bottom line.

That's very simple... but if you are willing to operate in the margins of complexity, you can end up far better off if you are willing.

But Realtor commissions are high. Closing costs for the buyer are high and I can't see paying closing costs which will affect the amount I get for my house.

Even if paying the buyer's closing costs would affect your amount TO YOUR BENEFIT?

Why not just lower the asking price?

That doesn't relieve the buyer's cash burden as much... so you eliminate all the pool of potential competitive buyers who COULD step up if you DID offer to cover their costs from "the top line."

LOOK... when the seller contributes to the buyer's closing costs, *EVERYONE* assumes that the sale price includes a premium to cover the seller's contribution, which then allows the buyer to pay a higher buy-price because they can do so with less actual cash-from-pocket.

Who's left holding "the bag"? The buyer's lender is who (and yes, the lenders are fully aware of this.) This is because the lenders know full-well that the seller's price is "grossed up" to the maximum of the appraisable valuye range to meet the contractual numbers... so the inflated "collateral" value is actually providing the lender less protection against the buyer's participation.

Hopefully you can wrap your head around this, breathe a bit easier, and use this knowledge to your negotiating advantage ;~)

Luck,
Dave Donhoff
Leverage Planner

    Bookmark   March 19, 2009 at 2:00PM
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jane__ny

Thanks, now I think I get it. So I don't negotiate a lower selling price, but instead offer to cover their closing fees.

I am assuming that comes up at negotiation so I know what they want? I wouldn't want to accept a lower price for the house and then find out they want me to cover closing costs also.

    Bookmark   March 19, 2009 at 11:25PM
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dave_donhoff

Jane,
If you accepted a lower price based on the agreement they'd be paying their own costs, you'd have a signed-around agreement to proceed from. If you do not have a signed-around agreement, and you agree-in-principal to a lower price, and THEN they come back asking for seller-contributions, you can then bump your price back up to account for the contributions.

Nobody can "sneak" anything over one you... just take your time & pay attention to the details as they occur.

Luck,
Dave Donhoff
Leverage Planner

    Bookmark   March 20, 2009 at 12:24PM
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