Let me set the stage. You have gone through all the steps to prepare your home to sell. We listed your pride and joy and put it up for scrutiny to the masses. Strangers have walked through your halls just after you vacuumed and carted the kids off to the park for the ninth time in the past week. And then, as a family, you sit and wait again for my call telling you the feedback from the showing of your home – crossing your fingers for an offer.
“Congratulations,” I say, “We received an offer of $345,000 which is $5,000 less than your asking price. The only condition the buyer requests is that you pay their closing costs.”
“What? Aren’t they the ones buying my house?” you say, “Why would I have to pay for their fees to close?”
This is the part of the sale that frustrates sellers more than anything else. Should the buyer even ask the seller to pay their closing costs?
Most people would say yes – absolutely! Nearly every time I meet with a buyer to discuss offers, they say, “I want the seller to pay my closing costs”.
While that may sound like a great plan, I always emphasize that the seller rarely pays for the closing costs in the end. They then look at me surprised – and I explain how the buyer is most likely financing the closing costs. I will show you how and why there are scenarios where this is still not a bad idea.
Case Study:
I have listed my house for $210,000. I want $210,000, but I know my drop-dead number is $200,000. I will hold onto the house instead of selling it for anything less than that.
I receive an offer for $203,000 with the condition that I pay the buyer’s closing costs of 3% ($6,090). With the offer at $203,000, I would most likely accept, but there is no way I am going to accept with the condition to pay the closing costs because if I am paying $6,000 in closing costs then the $197,000 I would receive is below my drop-dead number of $200,000.
I decide to prepare the following counteroffer to the buyer:
A) I will accept the purchase price at $203,000, but will only pay 1.5% towards the buyer’s closing costs.
B) I will pay 3% towards the buyer’s closing costs with a purchase price of $206,000.
C) I counter with a $200,000 sales price with no closing costs.
As you can see, in all of these scenarios, I receive the same bottom-line number of $200,000.
What does this mean if you are the buyer? Plain and simple, you are financing the closing costs! You may think that you beat up the seller and saved every dollar that you could have and then got the seller to pay your closing costs on top of that, but rest assured, this was not the case.
If the seller agrees to sell for any price and include the closing costs, then you should easily have been able to get them to agree to sell the home for said price less the closing costs.
In addition, if you take that $6,000 at a 4.5% interest rate over 30 years? It is actually an extra $11,000 over the life of the loan.
When does it make sense to have the seller pay your closing costs?
A )If you are an FHA buyer who does not want to drain your savings account to meet the down payment requirements, then it may be a good time to ask the seller to “pay” your closing costs.
B) A second example of when asking the seller to “pay” your closing costs would be when you are planning on only staying in the property for 5 years or less. This would allow you to keep the $6,000 in your account, as the interest you pay on that in 5 years won’t be that large.
I hope this has allowed you to understand a little more about how the seller paid closing costs work and how you can put that knowledge to your advantage.