"Potential buyer makes lowball offer and then asks for an additional $5,000 discount in the former of me paying their closing costs.
Yeah, that's reasonable. Great coaching by their "professional" agent."

Haven't negotiated much have you?

Closing costs or anything else for that matter is part of the initial contract offer, so it's all up for negotiation, meaning that the actual net price for the property is probably the same regardless of who pays the closing costs. The reason that a buyer may ask for the seller to "pay" closing costs is because that way the mortgage and the official purchase price are lower. This may actually benefit both buyer and seller, e.g. it lowers upfront costs, PPI insurance, and taxes and transfer fees; in my area, they are customarily split. Another possibility is that taxable capital gain for the buyer may be lower when the purchase price is lower.
So, there's a variety of reason why it makes sense to have the seller "pay" the closing costs. Obviously, as a buyer and seller, you'll look at the whole package when negotiating purchase offers.

OttawaValleyGardner... That remark was not intended for you, but for the OP, who after reading other of his/her posts, seems to have a dislike of how things are done here in America.

NC dude, have you ever worked in other sectors of the business world? Have you been involved in negotiations outside of property & real estate?
I ask because it seems that you think the bizarre customs inherent in real estate negotiations should be accepted as normal or standard without question. Frankly, you seem personally offended by my observations and questions.
In my business world (manufacturing), these types of tactics do not exist. My customers don't ask me to throw in a bunch of extras "for free" when we discuss product pricing. They know better. And I couldn't inflate the heck out of my sell price in order to cover extras that they might demand.
It's just a ridiculous practice, and muddies the waters of the deal.

Actually nosoccermom, seller paid closing costs does the opposite, it usually raises the sales price and then the mortgage. What it is primarily used for is young, 1st time home buyer who have excellent credit and can qualify for a little hihger mortgage but that don't have a lot of accessible cash for down payment and other closing costs. It allows the seller to pay from their proceeds, but since the amount is usually added to the sales price they don't technically lose any of their profit. It is a way for the seller to assist the buyer and make a sale which otherwise might not be made.

Frmrq,

I was from that sector of business as the customer. But all those rounds of golf, dinners, show tickets, cases of Christmas cheer delivered to me wasn't free. It's built into the price of your product. Things have changed today as in obvious graft has been curtailed but it still exists. My Dr. attending a medical device conference in Jamaica in January, it's all reflected in the price.

Same in real estate. All costs reflected in the price.

KMBC - In some cases the buyers may add it on to the sales price to make it look more attractive to the seller and I guess potentially for the agent too as they get paid off the sales price, but in other cases it can be a separate item and an addition to the sales price.

fmrquahog - You don't have to accept it just because somebody asks for it. I'm of the mindset in general if you don't ask you won't recieve when purchasing anything. Sometimes it has worked out, others not, but that is life.

You must be in a pretty nice business where customers are not negotiating options for the same price as something without those options, or asking for a volume discount, which is another form of negotiating. In my business experience this happens every day, just in different forms. It is the final total that matters anyways and that both parties are happy with the outcome that closes the deal right.

Only a few different ways you can become creative with ways to offer on a house in comparison to other products or services, so this is just one of those that works with real estate. You could always come back with yeah I'll pay it if you pay me this much more for the house, although this could cause issues with appraisals, or flat out say I'll take your offered price, but won't cover your closing costs. All in what will make you happy and what you think may close the deal if you wish to do so.

I get what you're saying, lyfia, but a volume discount (truckload vs 250 Lb drum, for instance) is not the same as some clown asking me to give him another $5000 off the price of my home to cover his settlement outlay.

FTR, we are now under contract and we are not giving a single cent toward the buyer's closing costs. Funny...in the end, the buyer accepted my price and my terms. But they wasted several days of my time, whining about closing costs. Whatevs.

I don't quite understand this. (I'm not being snarky, I'm genuinely confused....)

Are you saying that you dislike having to negotiate the sale price of your home?

If I go into a restaurant for lunch, and they tell me my order is $15...then I pay $15. I don't expect to negotiate the cost.

But certain services/goods are always a negotiated cost. Homes, cars, etc..

Nothing says you have to play the game that way though. If you want to sell your house for a set dollar figure, you are free to list it for sale and not negotiate that price in any way. As you know, that is not typically the custom and you may (or may not) lose some buyers over it - but if you don't like negotiating.....nothing says you have to.

As far as the "throwing in closing costs" thing - all I care about is the bottom line for me. Some people get hung up on the specific path...but in the end, it all just comes down to, do the numbers work for you, or not?

Anyway - is it the negotiating part that irks you about this?

(edited to add, we were cross-posting. Your response right above this one more or less answers this.... )

This post was edited by patriceny on Wed, Jun 19, 13 at 13:07

KMBC - Excellent explanation of why this is a fairly common occurrence and why it's done.

In some cases the buyers may add it on to the sales price to make it look more attractive to the seller and I guess potentially for the agent too as they get paid off the sales price

In my area agents usually add verbiage to the listing that no commissions will be paid on buyers closing costs paid by the seller.

I do think it is a form of inflating actual house prices though. It really should be discouraged on that basis. A house that sells for 250k without buyer assist looks like a lower priced home to an appraiser looking for comps than a house that sells for 260k with 5k buyer assist. It is a house price inflation that seems wrong to me... In the same way company benefits are not figured into income tax, frankly.

The US of A has some odd money things. Period.

No, I have no problem with a negotiation. In fact, I love negotiating, I do it for a living and I'm good at it, even though I prefer the (cliche) "win-win" strategy.
What befuddles me is when the buyer comes in with an offer of $x and then says "I want $5000 more in the form of contribution to my closing costs".
Why not just offer ($x +$5k) in the first place? Why the need to separate out a sum as closing costs?
So then I counter with reduced price $x and no extra contribution, and the oaf says "I'll come up to $x, and I still want $5k too".
Then I counter again at slightly reduced price of $x, and the buyer comes up another notch and says "oh, and I also want $2500 in closing costs".
Naturally, I say, "here is my best number, and I will not be offering anything further."
Then sleep on it and accept.
Dafug??
What was the logic behind the g-d closing cost insistence?
Just offer a number that you're comfortable with and quit tacking on an itemized closing cost request. Utter nonsense.

Ah-ha. Got it. So, you knew your bottom line. When you got there, you stopped.

Sounds more like your buyers just wanted to see how far they could push. :)

It's like the shell game dealers play when you buy a new car and are trading in the old one. God love 'em, they must make oodles of money off people who aren't paying attention....

I don't know if this is done everywhere, but often appraisers will ask the listing agent of a closed sale if there were any seller concessions involved in the sale.

I have sold many houses over the years and no one ever asked for me to pay anything towards their closing costs. I think this is something everyone hears about on HGTV and so now everyone thinks it's the norm. Not in my world it's not!! If it's a buyers market maybe they can get away with it, but since inventory is low now, I wouldn't even entertain the thought.

I have also bought many houses and have not once asked for the sellers to cover my closing costs. It wouldn't even cross my mind to do so.

If closing costs are out of your reach, then you probably can't afford to buy a house!

In many cases the bank wants to see where the closing cost money is coming from such as in cases mentioned before with first time buyers so they need to be spelled out for there to be no issues with the loan if the seller indeed agrees to give some money back to the buyer.

Terriks - I like that they do that in your area. That was not the norm here when we did do that kick back. Although it was not a huge amount I really didn't think we should have to pay for that.

fmr - You can't exactly ask for a volume discount with a house so they have just worked out different creative ways to do negotiations. In the end for you as a seller it shouldn't matter where the money goes - you should look at the bottom line.

Good luck and I hope your sale goes smoothly.

This post was edited by lyfia on Wed, Jun 19, 13 at 15:23

The reason is because so many people do not have enough money to cover their down payment, closing costs, and still have a cushion in the bank that is expected to cover the first three months of expenses in the house. By shifting the closing costs onto the seller, the buyer makes those part of the mortgage and the amount s/he has to bring to closing is decreased by the amount of the seller's "contribution."

I don't think people should buy homes with less than 20% down, their own closing costs, and enough money in savings to cover their first three months of mortgage, tax and insurance. If they don't have that much financial wherewithal they should not be buying a house.

Rafor, right on! We are of a like mind. So much so that I'm going to quote your entire post! :-)

"I have sold many houses over the years and no one ever asked for me to pay anything towards their closing costs. I think this is something everyone hears about on HGTV and so now everyone thinks it's the norm. Not in my world it's not!! If it's a buyers market maybe they can get away with it, but since inventory is low now, I wouldn't even entertain the thought.
I have also bought many houses and have not once asked for the sellers to cover my closing costs. It wouldn't even cross my mind to do so.

If closing costs are out of your reach, then you probably can't afford to buy a house!"

I had never heard of sellers paying the buyers' closing costs till I saw it on HGTV, (House Hunters, etc)) and from the remarks of some of the posters here it must not be an uncommon practice. I'm guessing when it becomes a buyers' market anything goes, so asking for closing costs might sweeten a deal when a buyer has had a house on the market for a while and is anxious to sell.

When we sold our house in southeast Florida in January, there was no mention at all of us paying the buyers' closing costs- and under the circumstances I wouldn't have expected to. But the house was in a high demand neighborhood, and we had three offers within two days after it went on the market ( it was only on the MLS for one day), and we sold it for the asking price.

We've never been asked about buyer's closing costs for any of the other properties we've sold over the years either.

we've sold and purchased several homes in different states over the years
we've never asked for closing costs nor been asked for closing costs
that being said, I can see where it would be beneficial to a first time buyer 20 percent down on a 250 thousand dollar house would be 50,000 which seems a lot for a
first time buyer
however, we've always purchased a home on what we had
and only once offered less than 20 percent down
I also think hgtv has caused a lot of folks to think this is a common option

Back when I bought my home (1996) it was not uncommon for first-time buyers to ask the seller to pay one point, or something similar. Now expectations are more extensive.

I think two factors that lead to these expectations, in addition to HGTV, are developers offering "no closing costs" for those who use their lenders and some realtors advertising that a seller will help with closing.

I see this happening on HGTV house shopping shows all the time.

I believe another reason that buyers ask for everything and anything is because of a crashed real estate market. It is supply and demand. Remember, when market was hot in early 2000s, some buyers needed to write an essay to get sellers' attention? Some buyers may want to take advantage of a down market. I bet a few desperate sellers would rather pay $5000.00 to dump their houses.

I don't think nosoccermom is wrong, she just looks things from a different angle, such as if sellers pay the closing cost, it would help buyers to carry a smaller mortgage than folding the closing cost into the entire loan....etc.

FmrQuahog, no need to be that uptight; there are many ways to make a deal, why people have to negotiate as you do? As long as the price, term and time line are accepted between a seller and a buyer, who cares?

Also, I don't think we can assume when a buyer asking for closing cost is because of tight on cash. There are many motivations and resons behind the request.

You can take or leave a transaction instead of criticizing how others manage their personal finance. Calling your buyer "clown" definately is a strange attitude trying to achieve a 'win win" transaction.

do you honestly believe I called the buyer a clown to his face, or through his agent??
don't be naive
I referred to him as a clown in here because this is the anonymous place to blow off steam

I don't think he was a clown, but a savvy buyer trying to preserve his liquid assets.

Do you honestly believe I thought you called your buyer name to his face?

This house transaction really got you! LOL!

azmom hit the nail on the head with her post.

It's really simple, a buyer makes an offer and you negotiate from there. As the seller, only you set the terms of the contract. That's it, period.

Asking for closing costs is and has been common in my area for at least 15 years.

What is the actual things included in closing costs? Agents commission, inspections, legal fees, what exactly? And do they vary region to region. What about moving costs or someone breaking a lease on a rental unit, that's a cost involved with closing? Where is the line drawn and is it clearly defined?

I'd hate to agree to someones closing costs and get a bill for 10K because they had to have Fluffy the cat flown to the new property.

This question is firmly in that old teacher's reassurance mode ('there are no stupid questions...') so please excuse my ignorance. Haven't bought or sold a house in 20+ years.

How exactly does this seller-pays-closing-cost work? I can't quite figure out what exactly the procedure is that is being discussed.

Somehow it sounds like the seller isn't discounting the house? I always assumed that was the situation, ie that if the house cost $100K and a buyer asked for an assist of $5K the seller then got a net of $95K. But from this discussion, it seems more that the sales price is being reported as X +Y, with Y being the 'assist', Y being added to the mortgage amount and then the seller gets the original price? Am I close? If so, how does that help the buyer? Any explanatory details much appreciated.

Southern,
You always write up an offer with actual #s. Never leave it open by not citing a #.
Very common here for buyers to ask for closing cost assistance. But only on properties less than about $250,000.

Nice try, pal. We're under contract waaay above $250k. The buyer got bad advice from his hack agent, and I crushed him in the negotiation.
You're entitled to your own opinion, but you're not entitled to your own facts.

@KMBC: You're right. I still don't understand the OP. Sellers and buyers look at the net price when negotiating an offer. The reason for having the seller pay closing costs is just a financing tool.

Does the name Maine_lawn_nut ring a bell?

^Ha!

Above 250k or not, first time buyers ask for a certain $ amount for closing costs (some times). They might not have 50K in the bank (because, frankly, why would you?... earning all of 0.1%). It is better for them to ask for the money "back"... Sort of like refinancing with cash back, without refinancing... Just writing it into the original offer.

And, yes, a seller can choose to accept, or not to accept.

I believe it was part of the housing recession. We'll see if now that we're back in an up market, with competing offers and back to being a sellers market, if the practice is reduced.

But, I admit, when I see houses selling for more than asking, sometimes I wonder--did that house sell for more than asking because of multiple offers and escalation clauses, or because someone needed 5k back in closing costs on a "full priced offer" pushing it higher.

ncrealestateguy,

You are in the business, please help with this question. Thank you.

How the closing assistance being handled with a mortgage application? We heard ever since market crashed, lending institutes have been quite cautious; therefore the appraisers they sent usually are stringent on property values.

If it is true, how would they agree to add closing assistance to the house value? Unless the house is sold way under valued? or seller provides cash outside of contract? May be there are other arrangements can make it work?!

This post was edited by azmom on Fri, Jun 21, 13 at 6:24

In the standard North Carolina Offer To Purchase And Contract form, under section 8. Seller Obligations, there is a subsection (h) Agreement to Pay Buyer Expenses.

The contract we are under shows $0 in the associated field. :-)

The appraisers are not permitted to know the "contract price" by the new rules. So, they aren't "approving" the cash back. They are only appraising. The mortgage must fall within the banks rules. Most people aren't taking out a 100% mortgage (no people). So, the appraisal might be 345k, a person might want a mortgage for 300k and the sale might have an agreed sale price of 343k. In this example, the bank would approve the sale since it met the terms. If the appraisal came back at 320k, the bank probably would not approve a 300k loan (not enough equity)...

Does this make sense how the appraisal is separate from the final sale price? Not only does the appraiser not know the agreed price; what he returns really doesn't matter as long as it is high enough to cover the terms of the lending-institution to lend the needed amount. That amount is never full value of the cost of the house.

Kirk, can you tell me a little about how appraisers are trained, or what sort of requirements/standards they must meet?
I understand that an appraiser is essentially the sole arbiter of the value of a home, and they have a fiduciary responsibility to a lender.
But what are the qualifications of a typical appraiser? Are they builders, designers, architects, tradesmen, what?
This is another area where I find myself puzzled. Some cat is going to take a look in & around my home and tell some lender what he thinks it's worth? Huh?
I sure hope it's not as arbitrary as it seems.

I have always found it bizarre. One of the offers on our current home (now under contract with a different set of buyers) asked for $5K in closing cost assistance. I found it just kind of obnoxious.

It's not obnoxious. It's a way to finance the closing costs. The net sale price remains unchanged, so the seller will get the same amount.
Scenario 1: Let's say a buyer offers 200K for a house. He pays down 20K and therefore needs a 180K mortgage. He also needs to bring about 6% in closing costs (12K), so needs a total of 32K to bring to the table. The seller gets 200K.
Scenario 2: Let's assume that buyer and seller agree to a sales price of 210K with the seller paying 10K towards closing costs. The seller still gets 200K at settlement. The buyer still pays down 20K, gets a mortgage for 190K, but now only needs to bring 2,600 (6% of 210K) to the table because the seller "brings" the other 10K. Thus, the buyer only needs 22,600 for down payment and closing compared to 32K in the first scenario. In both scenarios, the seller gets his 200K net.
Only issue is that banks will limit how much a seller can pay towards closing costs.

nosoccermom and Kirkhall,

What you said are the typical process and math to get a mortgage which have been used for a long while. Most of us experienced in the past when market was hot, appraisal value was equivalent to the sold price, so tag on closing assitance was easy.

What I am interested in knowing is in the current heavily discount property value environment, what math the sellers/and their agents are using to predict a selling price that would be high enough to get a bank loan and also cover the closing cost assistance.

Then, if they found that magic number, would it be possible the sellers believe the net price they would received is too "below market value" and refuse to sell?
Experienced folks like ncrealestateguy and brickeyee would have the answer.

One more dumb question, I heard that getting "kickback" is illegal in real estate transaction. What is that about? Is closing cost assistance a form of "kickback"?

I was a young, first time home-buyer with sterling credit and little cash. I had accumulated a lot of rescued, misfit cats (from the neighborhood...people moved off and left them), and I really needed my own home. I bought in 2002 in the same neighborhood where I was renting. The seller tacked $3000 onto the price of the home to cover my closing costs. This was a total snooze in terms of how common a practice it is. A decade later I now have a nice portfolio of rental properties (and steadily accumulating more), but it would have been next to impossible to buy that first home, where I am still living by the way, without the sleight of hand in manipulating closing costs.

Perhaps I didn't make my original point clear enough: this buyer was not willing to accept a higher sell price in exchange for a closing cost contribution from yours truly. I believe they were under the impression that they were donald trump or something, and were going to "own" me in the negotiation. They were given bad advice by their knucklehead agent, turns out.
The buyer started the negotiation by low-balling AND asking for $5k to boot. They kept pushing for closing costs, even after I lowered my price somewhat and told them no way on the additional reduction vis a vis closing costs.
In the end, They came up much further than I reduced, I held the line at a great sell number, and they are receiving zero closing cost contribution.
They wanted their cake, and wanted to eat it too.
But my daddy didn't raise a sap, soooo....me FTW.

"The buyer started the negotiation by low-balling AND asking for $5k to boot. They kept pushing for closing costs, even after I lowered my price somewhat and told them no way on the additional reduction vis a vis closing costs."

This is what my prospective buyer did as well. It was just a way to get us to swallow even more of a lowball offer than the offer higher up on the form. I stand by my opinion: Obnoxious.

nosoccermom, thanks for the explanation. That makes more sense - that the selling price is simply increased by the amount of any closing costs allowing buyers to borrow more. That is not legal in Canada, which is why I am not familiar with it (cash-back is not allowed, and a government insurance premium is added to any mortgage where less than 20% down-payment is made).

My uncle's home recently sold, and the realtor tried to have a $5,000 cash-back in the price to allow the buyer funds to repair the roof, but the bank refused it.

Cash back is also not legal in the US. But, sellers can pay part of the buyer's closing costs, which is not the same thing. There is a limit as to how much the seller can contribute. I think it's 3% of the loan amount. The buyer is not receiving any cash.

I work in an industry that bids for long-term, ongoing business for large sums of money. Part of many of the bids from potential customers is a request to pay some of the start-up costs for audits, implementation costs, and such. Sometimes we say yes, sometimes we say no. It's all part of negotiation, and what we each have to offer the other.

I don't see how this is really any different than asking for closing costs in a sale contract. I did it on my first home- I could have paid the closing costs with my own funds, but a large cash cushion in the bank was still more important to me than an extra $3500 on a mortgage. I bought a house way under my price range.

AZMom, I'm not sure what your question is? Are you asking what happens if an appraisal comes back low and the bank refuses to finance to the level that would have been required to buy at the agreed sale price?

Yes, in that case, the sale could fall through due to a financing contingency. The seller's could try to salvage the sale by accepting a lower offer, or they could say--too low--and not sell.

Is that what you were asking?

As for an appraiser's qualifications--I am not an appraiser, so am not certain if they are state-specific (I imagine they are, since most everything RE is state-specific). In my area, they have to do a lot of training and take a test. They are usually former REagents, but not always. It was suggested once that I look into becoming one (because I like to follow the market; visit open houses; am fairly analytical about things) but I have not really looked into it to learn specifics. So, I can't help you.

I still don't see why the asking for closing costs is any different from an other "obnoxious" low balling offer to begin with. In other words, it's not the closing cost but the low net sales price that could be considered an insult. Just reject it or counter.
It's also not any different from a seller asking for an "obnoxiously" high selling price.
In either case, the market will correct it. If not, then it obviously wasn't an obnoxious offer. No need to take it personally, in my opinion.

terriks,

Thank you for answering the "kick back" question.

kirkhall,

We all know appraisal could be too low to get a loan, it is a part of normal process.

What I asked was how agents help their clients to arrive that sweet spot that would get a loan and also make both parties happy.

May be there is no magic way, buyer and seller just have to negotiate, make adjustment and renegotiate until either the sale goes through or fails.