Seller Giving Money Back at Closing

blueheronJuly 3, 2010

I watch home buying shows on HGTV and often the sellers give money back to the buyers at closing, like $6,000. What is the rationale for that? Why don't the buyers just offer $6,000 less when they make the offer?

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Hi Blueheron,

If the buyer (assuming a U.S. transaction) is using institutional financing, the sellers are not allowed to give *ANY* cash back to the buyers*... for exactly the suspicion you are rightfully having; That its really a prima facie discount to the sales price.

(*Actually, the lenders sometimes *WILL* allow it... but they will underwrite the loan as the contract sales price MINUS the cash-back as the actual lendable sales price. This completely neutralizes the entire sleazeball purpose of such a tactic... which is to decieve the lender into lending more money than their guidelines actually allow by fraudulently representing a sale greater than is actually occuring.)

Institutional funding DOES often allow sellers (or any other interested party) to contribute exclusively to the buyer's allowable closing costs, up to a limited amount. The settlement statement (which the lender requires final approval to) must show where the contributions are going, and none of it can show up as cash back to the buyer (else, see above.)

Moral to the story;
A) Don't believe everything you see on the staged "reality" shows... they're low budget, and don't bother doing legal diligence in far too many cases,
B) Keep a healthy skepticism about legal COMPLIANCE of the foneybaloney antics of reality shows.

Have an outstanding, safe & celebrous Independence Day!!!!
Dave Donhoff
Leverage Planner

    Bookmark   July 3, 2010 at 7:47PM
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The cash back goes toward closing costs and is done because generally in those cases the buyer is cash poor or needs to hold on to as much cash as possible.

Example 1: House sells at $200,000, normal buyer closing costs $10,000. Buyer puts down 10% and pays closing costs.

Buyer total cash needed at the closing table is $200,000 x 10% = $20,000 and the add'l $10,000 closing costs = $30,000. Can't close without $30k cash.

Example 2: Same house, buyer offers to pay $210,000 but wants the seller to pay the $10,000 in closing costs. Buyer puts 10% down and no longer has any closing costs. Seller still nets the same amount of $200k so it makes no difference to them.

Buyer total cash needed at the closing table is $210,000 x 10% = $21,000 total, and no closing costs.

The net effect is that the buyer is able to buy the exact same home, but can bring $9,000 less cash to the closing table. This $9,000 is now embedded in their mortgage instead. 180k is financed by the bank in first example, $189k in the second. If you're a buyer and only have $25,000 cash in this example and are putting 10% down, you could only buy the home if the seller agrees to pay part of the closing costs.

The above only works if the bank agrees the home is worth $210,000. If it appraised below that number, they wouldn't agree to allow you to pay that price for it.

As to what Dave is alluding to, the $$ generally must be applied toward closing costs.

    Bookmark   July 4, 2010 at 10:43AM
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Thanks for the explanations. Now I get it.

    Bookmark   July 6, 2010 at 5:59PM
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