I’ve been watching a lot of HGTV lately. It seems nearly every home buyer wants the “seller to pay closing costs.” What does this mean, exactly? Where do the funds come from? Does the seller have to pull cash out of pocket? That seems unlikely, as I don’t know too many house-sellers who have tons of cash lying around, either.
It usually happens during the settlement process. If the seller offers to pay $10,000 in closing costs then $10,000 is deducted from the seller’s proceeds and credited to the buyer during the settlement process.
This is just a way of financing the closing costs, right? I mean, if I was selling my house and the buyer wanted me to pay $10,000 in closing costs I’d only agree if they bought my house for $10,000 more than they were going to.
Perhaps the best way to say this is that the seller cares principally about the net amount he will realize from the sale, and not so much about the details of how that’s calculated.
For the same reason it’s a bit silly to hear the common tale of how the seller pays the agent’s commission, which is therefore of no concern to the buyer. Sure, the seller writes the check, but he knows this and takes it into account when negotiating. A buyer who can approach a seller in a way that avoids the agent and the commission will reliably secure a better price.
Completely true, and it’s always good to keep what you’re really negotiating in mind, but also consider the reality of a very bad market for sellers. I’ve heard the argument lately that homes, especially lower cost ‘starter’ homes, are being jacked up in price because the sellers know the buyer is likely to be getting $8000 refundable tax credit. It’s an interesting theory but it doesn’t hold up to reality considering how long homes are on the market and the rate of price reductions.
Say someone buys a home for $255 that’s been on the market for 8 months, originally at $275, reduced to $260 and they also get $6000 in sellers concessions. Obviously the seller knows what they’re bargaining away, but the facts don’t support it being something they built into their original listing price.
On rereading I realize I made it sound like you were suggesting that when you weren’t, but I do think lot’s of people convince themselves they’re not really getting something out of the seller because it was ‘built in’ and that’s wrong.
But your assuming the original price wasn’t inflated to begin with. Often the original price is inflated and not realistic.
I’m sure the seller is looking at the entire deal and what they are walking away from the table with. From the buyers side there is an advantage though. Back when 100% financing was easier to get the bank still wouldn’t lend you money for the sale price + closing costs. (or so I was told anyway) If you negotiated the sale price to include your closing costs then you could use that, higher, number to work out financing.
The standard in Calgary is buyers pay no commissions/sellers pay all the commissions (I assume this is what you’re talking about when you say “closing costs”). When you’re getting into the housing market, all your money is going to down payment. When you’re selling, you pay the commissions out of the proceeds from your sale (so you take these costs into account when you’re figuring out how much money you have available for the down payment on your next house. There really aren’t any closing cost negotiations here. The system works pretty well, I suppose.
When I bought a house this year. Our offer was $250,000 with a $5000 credit for closing costs. we got an 80% loan, $200,000.
When all the closing cost that the buyer normally pays were added up $5,000 was subtracted from the total. Leaving us responsible for $9,680. So we put up 59,680.
Our bank added $200,000 for a total of $259,680. The escrow company deducted the buyers share of $9.680 and also deducted the sellers expences from the total. What was left was sent to the seller, another bank.
The seller does not have to have cash on hand it is deducted from the sellers share.
Seller’s paying buyer’s closing costs is a recent development due to the poor real estate market. Buyer & seller negotiate the price, and then buyer comes back, as the buyer has the bargaining power in the current slow market, and tries to chisel the amount down by having the seller pay the buyer’s closing costs.
Yes, I’m trying to sell a house now, why do you ask?
No I’m not. Real estate values all around the world were incredibly inflated and not at all realistic. Not universally, but it was a global bubble.
When I’m talking about closing costs for the buyer I am referring to title search fees, loan intiation costs, flood plain search fees, etc.
IOW, the expenses you need to bring to the closing beyond the down payment.
I have never found this to be true. When I was looking for a house I stopped looking at FSBO houses because they all wanted too much. Furthermore, every seller wants the most they can get. They are not going to give you a discount because they don’t need to pay the agent. They will pocket that additional amount themselves. You buy a house because you think you are getting a good price, not because you are avoiding the agent’s fee.
Remember that in some areas, such as the county I live in now, the seller routinely pays most of the closing costs that re not associated with the buyer’s own financing. I’ve lived in other states where the costs were evenly split between the seller and the buyer, and in one case, the buyer actually had to pay most of the costs by custom.
It was very common for the seller to “sweeten the deal” by offering to pay all or part of the closing costs as an enticement to the buyer. It dependes on the local market conditions and how desperate the seller is to close the deal.
Sellers do lots of things to entice buyers… they throw things in that you wouldn’t expect, such as a plasma TV, they extend the closing period to suit the buyer etc. In the case of paying for closing costs the seller isn’t bringing a check to the settlement, they are simply going home with less money than they would otherwise.
Let’s take the simple example of a house selling for $200k with a 6% commission due if the house sells to someone who went through the agent. There are three potential buyers who contacted the agent, and you who didn’t.
The best offer from those three is $190k. You offer $185k. Other things being equal, which offer is the buyer going to accept?
Ah, I see - I think those are all included in your own legal fees in real estate transactions here. Once again, I am reminded that the Canadian real estate system and US American systems are completely different.
OK… From the buyer’s side, I’m assuming there’s a big difference between seller taking on closing costs and not. The buyer has to pony up cash out of pocket for down payment and closing costs, but the total amount of the loan–whether $250k or $255k, has more impact on monthly payment than it does on up-front money at closing. (That is, most buyers would rather have a mortgage that’s $5k higher, but not have to pay $5k more cash out of pocket at closing.)
But from the seller’s side, is there any difference whether the house is being sold for $250k or $255k minus $5k closing costs?
Realtor protect themselves from this in their listing contracts. If you know someone who may be interested in buying your house, you can name them in the contract in advance, and normally the realtor will agree to not take commission. But if anyone else offers to buy while it’s under contract, the agent gets their commission.
Often true. My point is that a buyer who can step around the need for a commission can reliably expect a better price.
I have a friend who has made very serious money in Boston-area real estate. He describes real estate agents as “A tax on stupidity and laziness.”
I’m glad things have worked out so well for your friend, but I wouldn’t make such a blanket statement about real estate agents in general. They have their place in the world of real estate.
I was merely pointing out that the example you used was incorrect, and why.
My experience has been more along the lines of Ethelbert’s, both as an appraiser and as a buyer.
If a home is accurately valued at 200k, I’ve never seen a seller yet that lists it for 6% less because they aren’t paying commission.