Closing cost are fees that are paid for the closing of a home loan. Closing cost usually included loan fees for the loan officer for helping with the loan, the appraisal fees, administration fees, determining flood maps, used to help close the loan.
Many times in a real estate transaction, the seller of the home will agree to pay the buyers closing costs. If you are selling your home and you have a reasonable offer for your home, you should expect to pay the buyers’ closing costs.
I appraised an attached home the other day where a buyer offered to buy the sellers home if he agreed to pay 3% of the closing cost. When I got to the home, the owner was pissed because he did not want to give 3% of this money to the buyer for the closing cost. The seller thought he was losing this money. In this case, he was absolutely incorrect.
In any market, there is a range of value for homes in any area and in this case, it is no exception. When the owner decided not to proceed with this deal, I was half way through the appraisal and enough to come to a conclusion regarding his home value.
His home was priced at the higher end of the value range and even after paying 3% of the buyers closing cost he would be getting the top value for his home. If he would have accepted this deal, he would be getting a reasonable amount for his home. The buyer of the home would be paying full market value of the home. Little does the buyer know they will be increasing their loan to pay for their own closing costs.
The moral of the story is if you are selling your home and you agree to pay up to 3% to 5% of the buyers closing costs and the value of your home is at the higher end of the value range, you are not losing. You are wining. You see, this is because the buyer will take out a larger loan to buy your home and use some of the money to pay their own closing cost. So while it seems like you’re losing the closing cost money, in many cases you are not.
Ask seller to pay closing costs
When buying a home, should you ask seller to pay closing costs?
When selling a home, the seller sometimes offers to pay for closing cost. The buyer believes that this is helping them because the seller is taking a reduction of money that may have gone to them, if they did not pay closing costs. But the truth is the buyer will be paying his/her own closing costs. Let me explain.
The home you’d like to buy is $100,000. The buyer has agreed to pay $100,000, so the Realtor writes the offer at $100,000 and that the seller agrees to pay 3% of the buyers closing costs. If the seller agrees to this offer, they will get 3% less than what the home is offered for. The buyer will use the 3% or the $3000 that will be given to the title company to pay for closing costs and other fees.
In any market the asking price or listing price of a home will normally always be less than what the home sells for. This is because the Realtors will start at a high price and reduce the fee with agreement from their client (the owner of the home). So, the Realtor and the seller of the home are aware that they want $97,000 for their home and the 3% reduction in price is a result of negotiations from the seller and the buyer.
Now in this case, the seller has greed to pay up to 3% of the buyers closing costs. Here’s the truth. The real estate appraiser determines the value of the home. He finds four comparable sales. The adjusted sales end up being $96,000, $93,000, $97,000, and $103,000. The best, most recent comparable sales, listings and pending sales support a value of around $97,000 to $100,000. Now the real estate appraiser has to decide if a value of $100,000 is reasonable. They determine this by reviewing all of the sales, how long the home is listed, the condition of the home and simple ask the question, is the value of the home reasonable and supportive. Let’s just assume that in this case, it is and the home is appraised at $100,000.
Now the seller gets $97,000 (the price that they wanted) for the home. The buyer will borrow $100,000. The bank will use $3000 to help the buyer get into their new home. So you see, in all reality, the loan that the buyer agreed to and the $3000 you thought that the seller is given to you is actually your own money. Pretty tricky, don’t you think.
So, the next time you buy a home and you think that you’re getting a good deal because the seller has agreed to pay your closing costs, think again. You just increased your house payment by $3000 over your 30 year loan. You paid your own closing costs.
Now if you’ve negotiated the price first and then asked for closing cost, you may be getting a better deal. Because now the seller of the home will have to reduce their home price and take money out beyond the typical 3% reduction in home prices.
So should you ask seller to pay closing costs?
What I’ve found is that Realtors will only want to do one or the other, not both. Try getting both. It’s to your advantage. This is because you will be reducing the amount of the home so you can borrower less money and pay the Realtors less commission.