Word of The Week: Seller Paid Closing Costs
It’s a buyer’s market. Ask anyone on the street or anybody in the Real Estate business and they’d concede this much. Along with the term “buyer’s market” there are a number of items that people assume are true for this type of Housing Market.
- More Homes Available
- Lower Prices
- Lower Mortgage Interest Rates
These are just a few of the factors that make today’s real estate business more attractive for buyers than sellers. However, another aspect of most transactions nowadays is that buyers are asking for sellers to pay for a certain amount of the buyer’s closing costs.
In the profession, we call this “Seller Paid Closing Costs”.
It may also be referred to as “Closing Costs Contributions” or “Seller Paid Points” for you mortgage interest rate buy-down.
No matter what you call it, the basic principle is that seller’s are being asked to help front the cash up front in order the the sale to go through. In a typical stable market, you might see Seller Paid Closings Costs in about 25% of sales. In our current market, I’d estimate it to be more like 60-70%.
Why?
Well, the buyer has the power right now. If you’re a typical owner-occupant seller (which means you have some equity in the home) then you want to sell for as high a price and as quickly as possible. You may want to take an offer that pays you decently, but realize if you say “no” to such a clause in the contract, you might not close the deal and be stuck in your house.
This goes for banks too. They don’t like owning property, and to they’re not very good at selling it either. So to get a lot of foreclosures to sell, a lot of Banks are allowing up to 3% of the sale price in these Seller Paid Closing Costs and in some cases up to 4 or 5%.
The idea is that the buyer can qualify for the loan and has enough funds to buy the property. But to help offset the costs of obtaining the mortgage and processing title work, they may want to keep some cash in their pockets for improvements or repairs once they move in.
This is especially true for bank-owned properties and for First Time Buyers just entering the housing market.
In essence, they are swiping their “Mortgage Credit Card” at the check-out counter for the Sale Price amount (let’s say $100,000). At the same time, they ask the seller for 3% back in closing cost help ($3,000).
So the “Net Offer” the seller is looking at will be $100,000 – $3,000 = $97,000
When you get into a multiple offer situation on a property, you’ll want to think hard about asking for more money. The seller will want the highest offer with the least contingencies and best closing date for them (the sooner the better, in most deals).
If you put Seller Paid Closing Costs into your contract, then be aware they might counter-offer with a lower amount or possibly reject the offer altogether.
Regardless of whether the seller is an Owner or a Bank, it’s not unreasonable in our housing climate to ask for such costs, especially if you have little money in reserves. Most people agree it’s better to finance this small amount rather than have to pay for it up front.
Ask your agent to help you determine how much, if any, you should ask for in Closing Costs Contributions.
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[...] family or co-worker? Closing costs cannot be financed in the way you may think. The only way to “finance” costs is to have the seller pay them. So why would that make them financed if the seller pays them? As [...]