Closing Costs!

[Deleted]

My wife loves watching either HGTV or Food Network (the only two channels she watches basically).

Anyway a few nights ago we were watching HGTV and it was a show about house hunters or property virgin, I am not sure. Anyway, the buyer wanted the seller to pay their $7,500 closing costs or something similar.

My question: Why would a seller pay for someone closing costs?

I am sure I would not mind asking for it when it comes our turn to buy a house (yes what a hypocrite I am) but I still don't understand the incentive the seller has to pay your closing costs?

In one episode, the seller agreed to cover the closing costs but he would increase the selling price by that amount and I thought: Hugh... so what's the purpose? It's a wash!

[Mardi Gras Audrey]

Actually, it is quite common especially now that the market is down. As to why would a seller pay the closing costs? To get the house sold. By paying the closing costs, the buyer doesn't have to come to the table with as much $$. This helps them to save cash or to get a house that they couldn't get into because they didn't have to bring as much $$ to the table. Also, if the sales price is raised while the seller "paid" the closing costs, the buyer is basically spreading his costs out over 30 years (Vs bringing the cash to the table). Many people prefer to do that and the seller is more than willing to do that to get the house sold. When I sold my home last year, I paid part of the closing costs. This made the buyer happy (They weren't putting much down in the first place and they had to bring less to the table) and me happy (I got to sell the house... I was going to be bringing $$ to the table anyways so it didn't really matter if it was in the form of "closing costs" or principal).

[hoops902]

Basically audrey has it. By paying the closing costs it's essentially allowing the borrower to roll the closing costs into their loan. The price is higher than if the buyer paid the costs themselves, and the added amount gets rolled into the loan.

The incentive is that you can sell your house to someone who can afford whatever the required downpayment is, but who might not also be able to afford to bring cash to cover closing.

[Deleted]

It's honestly no different than submitting a lower bid. But as other people have said, it allows the buyer to bring less $$$ and spread that cost over the loan. Only I'm sure they don't think about it that way. They think they got a major concession from the seller.

Sometimes it IS a major concession when it shouldn't be. My son couldn't get his seller to pay closing costs; the guy's attitude was, "I paid my closing costs; you pay yours." This is the same guy who, when asked to fix a broken window, told my son, "It was broken when I moved in."

Yes, yes, yes. My son probably shouldn't have bought from that seller, but I was being GoodMom and stayed out of it. I did pay for the home inspection as a housewarming present, but I'm not sure it did any good.

[happyscooter]

I see that on all of the HGTV shows. (That's about all I watch anymore.) And the buyers agent says 'the seller usually pays all of the closing costs.' I'm thinking, not around here they don't. The person buying my mom's house from the estate came in asking for $10k less than the asking price and all of his closing costs paid.

[Gardening Grandma]

It really does depend on the market. You never used to hear of it. My son just sold his house and agreed to pay $7000 in closing, but he raised the price by $5000, so actually he ate $2000 and the buyer financed the rest.

Why would a seller agree? As Audrey said, to complete the sale. As far as it being a "wash", not exactly. It doesn't require the buyer to come up with as much cash.

[Deleted]

Apr 15, 2011 8:21:36 GMT -5 Gardening Grandma said:

As far as it being a "wash", not exactly. It doesn't require the buyer to come up with as much cash.

Mathematically it is to me

House is on sale for 280,000

a) The buyer offers 265,000 and wants 7,500 at closing
b)The seller sent it back asking 272,500 and agreeing to pay the closing costs for 7,500

So to the seller it is a wash. He brings $7,500 to the table that he will get back once his house is sold. Technically his house sold for $265,000 and he recuperate the money he brought at the closing.

[alabamagal]

When we bought our house, we put in our offer with the seller playing most of the closing costs. We had a very limited amount of cash for downpayment, and the market in our area was very depressed at the time due to large employer shutting down. This was 25 years ago. It worked out well for us. We are still in the house!

[Gardening Grandma]

Apr 15, 2011 8:34:40 GMT -5 TheHaitian said:

Apr 15, 2011 8:21:36 GMT -5 Gardening Grandma said:

As far as it being a "wash", not exactly. It doesn't require the buyer to come up with as much cash.

Mathematically it is to me

House is on sale for 280,000

a) The buyer offers 265,000 and wants 7,500 at closing
b)The seller sent it back asking 272,500 and agreeing to pay the closing costs for 7,500

So to the seller it is a wash. He brings $7,500 to the table that he will get back once his house is sold. Technically his house sold for $265,000 and he recuperate the money he brought at the closing.

You're right. From the seller's point of view, it is a wash as long as the price is raised enough to reflect the closing costs. I was thinking of the buyer's pov.....

[Deleted]

There's a limit to this, though. Let's say the value of the house is $100K. You agree to pay $5K in closing costs. If you agree to a price of $105K for the house, that affects the loan-to-value ratio and the bank may not be willing to make a loan for 80% of $105K.

I can see why it's an attractive option, though. When I bought my first house, we were struggling with that very issue- scratching for money to bring to the closing but with the ability to take on a decent monthly payment given our combined incomes. Unfortunately, we were using a government program that no longer exists (MGIC) and were borrowing the max the program allowed at the time, so every extra dime we needed at closing had to come out of our pockets. I just about died when I found out we needed to pay for the oil in the underground tanks. There were 2 of them since it was a duplex- 500 gallons each, recently filled.

[Gardening Grandma]

Also, the house has to appraise for enough to cover the higher amount that will be financed....

[Havoc]

I don't think it's that uncommon, and it has certainly become more common in today's market. We have had the seller pay at least part of our closing costs in every property that we have purchased (with the exception of a HUD home) -usually make an offer at x dollars plus 1 or 2% credit back at closing. The first time was in '98, our first home and we were scraping cash together to make the DP and have reserves that would satisfy the lender. After that, we weren't under pressure so our purchases were more selective/opportunistic, and we were looking/negotiating for deals.

We've never accepted a price increase in return for closing costs, though... and am not sure that I would. I know that the math shows it would be better to finance as much as you can, but we just like keeping debt ratios within our comfort zone...

[Mardi Gras Audrey]

Carl,

Paying the closing costs can also help the seller, if they are short on cash. If the home inspection revealed stuff wrong with the house and the buyer wants that stuff fixed, it is possible that the seller doesn't have the cash to pay for it and can't qualify for a HELOC (Or could qualify but who would take a HELOC out while your house is for sale? ). If the seller doesn't have the cash on hand to fix the problems but has some equity in the house, the repairs could be "paid for" by paying some of the closing costs (This will free up the buyer's cash to make the repairs while saving the seller from having to pull cash out of their pocket before the sale). This also helps the buyers because they can pick the repair person and will have more leverage if the job is done poorly (If the seller makes the repairs, they will probably look for the place that will do it the cheapest to get it past inspection. The buyer may want it done with more quality materials or pick the color (For carpet replacement, siding work, paint, etc). It can be a win-win for all

[kgb18]

When we bought the seller paid $7,000 of our closing costs, and we paid the remaining $500 or so. In our case, we agreed to a quick close, skipped the inspection and paid full price, but we asked for her to pay closing costs and we asked for some things to be left in the house (like the washer and dryer) that weren't initially party of the sale. We made the offer. It was accepted that night, and we were moved in to our house less than a month later.

[8 Bit WWBG]

...:::"I'm thinking, not around here they don't.":::...

Agreed. Even though I bought in a buyers market, I bought in a desirable area. The sellers rightly balked at paying my closing costs, and I knew they would. I still got it below asking price, and got their new washer/dryer. Houses in my area still sell at or above asking even in this "recession".

It all falls under that umbrella of "the worst they can say is no". You only stand to gain.

...:::"My wife loves watching either HGTV or Food Network (the only two channels she watches basically).":::...

We should start "the saving channel". If your wife had access to quality programs like "living below your means" and "say no to the impulse purchase", I think she might come around quicker to your line of thinking.

[thyme4change]

In one episode, the seller agreed to cover the closing costs but he would increase the selling price by that amount and I thought: Hugh... so what's the purpose? It's a wash!

You can't borrow more than the sales price - so if you include a bunch of stuff in the sales price (washer, dryer, closing costs, carpet allowance, etc.) then the seller comes out even and the buyer gets to finance the cost of those items over the life of their mortgage. It is great if the buyer is cash-poor, otherwise they would have to pay for all of that - cash money.

It is also great for the neighborhood, because that comp just says "$200k" not "$200k, but the deal included the patio furniture and closing costs, so the house down the street should really sell for 10% less."

[thyme4change]

Also - many sellers price with the idea that they will pay closing costs.

[2kids10horses]

thyme,

The MLS has caught up with that trick of raising the price and paying for closing. It's now reported if the Seller contributes on the sale. So, while it may initially look like the house sold for $200K, if they paid $10K in closing costs, it shows up. A savvy agent will detect that and know that it really sold for $190.

Paying for closing costs is pretty much standard these days. Freddie and Fannye have recently been advertising they would pay 3% or 3.5% of the purchase price in closing costs. They look at it as just a cost of doing business.

[azphx1972]

It's good for the real estate agents as well, as they get 3-6% cut of a bigger pie.

[2kids10horses]

Not always good for the RE agents. Some realize that the true sales price is inflated, so the commission is only paid on the net.

[Deleted]

Thanks for the responses. So most sellers consider it as a cost of doing business. Something for me to keep in mind in the future.

[azphx1972]

Apr 16, 2011 9:22:34 GMT -5 2kids10horses said:

Not always good for the RE agents. Some realize that the true sales price is inflated, so the commission is only paid on the net.

Interesting. Thanks for that bit of info.

[zibazinski]

No kidding. When I was selling my rentals, I put in there listing agreement, no commissions paid on seller concessions. That would handle a higher sales price with me paying closing costs. To sell my last place, I did agree to pay part of the closing costs but upped my asking price. We were both happy. That area is now selling for less than I sold my house for so I am SO very happy to get out.

[Deleted]

"many sellers price with the idea that they will pay closing costs"

This has been my experience. It's very common (in fact expected in some markets). In areas near a military base many homes are purchased with a no down VA loan. Ditto for houses that are in the FHA or "starter" markets.

Raising the sales price is pretty tricky. Most appraisers look at houses listed in the last 90 days they will notice if the price was listed lower than the sales price.

[2kids10horses]

I think you meant Sold for more than list. You see that all the time. Not unusual.

[AgeOfEnlightenmentSCP]

Apr 15, 2011 8:49:58 GMT -5 Gardening Grandma said:

Apr 15, 2011 8:34:40 GMT -5 TheHaitian said:

Mathematically it is to me

House is on sale for 280,000

a) The buyer offers 265,000 and wants 7,500 at closing
b)The seller sent it back asking 272,500 and agreeing to pay the closing costs for 7,500

So to the seller it is a wash. He brings $7,500 to the table that he will get back once his house is sold. Technically his house sold for $265,000 and he recuperate the money he brought at the closing.

You're right. From the seller's point of view, it is a wash as long as the price is raised enough to reflect the closing costs. I was thinking of the buyer's pov.....

Less cash out of pocket.

[AgeOfEnlightenmentSCP]

Apr 16, 2011 9:22:34 GMT -5 2kids10horses said:

Not always good for the RE agents. Some realize that the true sales price is inflated, so the commission is only paid on the net.

I realize we're talking realtors here, and I'm not sure the average re agent has enough sense to figure this out, but...if it's the difference between a sale, and no sale-- the amounts we're comparing really are $0 or 3% to 6% of the net. I realize there are many dim bulb realtors out there who will hold out for $0...but I'm just sayin'....

[Deleted]

"I think you meant Sold for more than list"

2Kids, I assume you are referencing my post? If so, we are saying the same thing.

"You see that all the time. Not unusual."

I think it depends on your market. The ones I've been following are N. San Diego County, N San Mateo County (near San Francisco) and N. Maricopa County (North metro Phoenix). I'm not seeing it happen in these areas.

But I certainly can envision a scenario where a house is deliberately underpriced compared to FMV to generate offers and where a price might be raised to accommodate an offer that includes the seller paying closing costs. The trick then would be to ensure that the adjusted sales price is not higher than the market range. As GG points out the lender isn't going to finance at 105% of FMV.

[zibazinski]

I think if you are serious about selling, you depersonalize. I don't want strangers going thru my stuff anyway or looking at family pictures. De-cluttering is a great idea regardless. Some of the staging ideas are good ones. You may like your small bedroom painted your collegiate colors but to a buyer, it's ONE more hassle!!!!

[2kids10horses]

bonnap,

On the MLS, you can see what the list price is, and what the final selling price is. It's not at all unusual to see a house listed at $100,000 to have a selling price of something like $102, 400. Or something like that. Obviously what was done was to put the closing costs into the selling price, and have the seller pay for closing.

Who is to say what FMV is? On something like this, you can't say that the house is worth $100K but definately not worth $102K. Come on... pricing something like this is an estimate. For, this house, it is WORTH $102,400 if the seller will pay closing costs! How do we know? We have a contract signed by a willing seller and Buyer! A separate question is: Will the house appraise for that? If the comps in the neighborhood are selling for $90,000, probably not. If the comps are selling between $99,000 and $101,000, it probably would.

Of course, all real estate is local. Things may be different where you are.