Should the Seller Pay the Buyer’s Closing Costs? 2017 Update
The Portland real estate market is roaring back to life after an unusually quiet first quarter. (If you’re not around from here, it was an unusually difficult weather cycle!) When things are quiet in a real estate market or when a home does not sell right away many sellers will see an offer where the buyer is asking the seller to pay $3,000, $6,000, even $10,000 or more of the buyer’s closing costs. Should the seller pay these buyer’s closing costs? The short answer is maybe, this article will help you understand the pros and cons.
Doesn’t the seller have their own closing costs?
Yes, the seller in Oregon has closing costs governed by the state. It is called “owners standard coverage” and it is basically title insurance, insurance that covers the transfer of ownership from seller to buyer. This closing cost for the seller is determined by the sales price. Currently around $1,150 for a $400,000 home for example. Additionally the seller typically pays a government service fee of $25 per lot and real estate and tracking fee of $110 (per loan), adding up to say $135 for a home on one lot with one mortgage. Then the seller splits the escrow fee 50/50 with the buyer. This is not set by state law or mandate, but is the default language in the home sale contracts used by the majority of real estate agents in the state. Washington County also has a transfer tax the seller has to pay, $1 per $1000 of the sales price split 50/50 with the buyer, or $200 on a $400,000 home. A typical escrow fee for a $400,000 home would be $1200, so $600 to the seller. Add all this up and the seller is paying $1885 in closing costs on a $400,000 home and in Washington County, paying $2085 in closing costs.
Why does the buyer ask the seller to pay for closing costs?
The buyer’s closing costs on a $400,000 home are likely to be 5x that of the sellers, or upwards of $10,000 vs. $2000. The buyer also has a down payment of 3, 5, 10, 20% or more. The buyer must also pay for a home inspection ($300 – $1200) and a home appraisal ($500 – $1500) out of pocket. There are a ton of out of pocket expenses for a buyer. This is why they sometimes ask for help with closing costs. The seller, on the other hand, may have zero out of pocket expenses. The real estate agent takes on the cost of marketing the home and the seller’s closing costs are taken out of the proceeds from their home’s equity. They often pay nothing out of pocket.
Does the seller end up paying for more than they realize when they pay for the buyer’s closing costs?
Often the seller does not realize the true cost of paying for the buyer’s closing costs. For example, the real estate agent commission in Oregon is typically based off the sales price. The title insurance mentioned above is based off the sales price. So if you have an offer in at $400,000 with the seller just paying their own closing costs, the commission (let’s take our max. rate of 4.25% to pay both agents) would be $18,000. Now a second offer comes in at $410,000 with the seller paying 10,000 toward the buyer’s closing costs. In this case the commission would be $18,450 and the title insurance would also increase by $10, plus another $5 in if you live in Washington county. So the seller paying the buyer’s closing costs of $10,000 would actually cost the seller $10,465.
Does it hurt the transaction if the seller pays for the buyer’s closing costs?
It can. Let’s say the seller in the above scenario accepted the $410,000 offer that included paying $10,000 toward the buyer’s closing costs. Now let’s say the appraisal came back at $400,000. We have a problem. The buyer typically has a full appraisal contingency, meaning they can walk away from the transaction if the home does not appraise at the sales price and the sales price by legal document is $410,000 it is not $400,000. So if there is any risk of the home not appraising, this can complicate the transaction, potentially hurt the sale. Also, a buyer that needs to ask the seller for closing costs may not be as financially sound as a buyer who does not need to ask at all, so there could be a slightly higher risk that the buyer who asks for closing costs will fail to finance the sale, which is another contingency in your typical offer.
Is it crazy to pay the buyer’s closing costs?
No. It is not a positive element in their offer, but it is not crazy. Most buyers are able to finance the loan even though they ask for closing cost help. Most homes appraise. So it is not crazy, but it is also not ideal for the seller.
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