Should Seller Pay Buyer’s Closing Costs? – 2019 Update
1. Why does the buyer think the seller should pay?
Many times sellers have not purchased a home in a while and it is easy to forget just how much it costs upfront for the buyer. The buyer must pay for the home inspection out of pocket (now typically around $500 or more for older homes), pay for the appraisal out of pocket (now often over $1,000), pay the downpayment (typically 5 to 20% with only 20% getting the best loans) and put down earnest money immediately (included as part of the downpayment and typically 1% of the sales price in our area), and pay loan origination costs and closing fees. That is a lot of money upfront. Even for a starter home in the Portland area a home buyer with a good paying job and excellent credit, might need to save $20,000 or more before they can make an offer.
2. Lower priced homes are more likely to get this request from home buyers.
Sure, many repeat home buyers will have the sort of money on hand we talked about above, or will be taking it direct from the immediate sale of their home. But for first time home buyers they need to save, sometimes for years, before they have enough liquid cash to purchase their first home. A first time home buyer could potentially purchase their first home a year or more faster – if the seller is willing to pay their closing costs.
3. Should the Seller pay the Home Buyer’s Closing Costs?
If the seller has the luxury of receiving multiple offers, it would be hard to see any reason to accept an offer where the buyer wants the seller to pay their closing costs. However, if the seller has been on the market for months and this is the first reasonable offer they’ve received – they should take a look at it. Keep reading to learn all the risks.
4. The Seller paying the Buyer’s Closing Costs could hurt the sale. Know the risks.
- Qualified vs. Over-Qualified Buyers. These days virtually every offer comes with a pre-qualification. No seller needs to overly worry about receiving offers from buyers who haven’t seen a lender yet. These days buyers come pre-qualified in nearly every situation. But how qualified are they? The seller cannot ask for all of their personal financial information, but they can read between the lines of an offer! If they have the lowest possible downpayment, low earnest money, and are asking for the seller to pay their closing costs, they may be qualified – but barely. Anything that rocks their financial ship could end the sale prematurely. Now, then there are over-qualified buyers who are typically putting down 20% (often there isn’t much advantage to putting down more than that) and are paying all their own closing costs. This means if something rocks their financial ship a little, they still have a really good chance of qualifying for the same loan amount. Once again, if this is the only offer a seller has, don’t turn it down out of hand. Most of these offers I see come in, still close! They are simply a little riskier than a better financed offer.
- Inspection failure. You might not think that having the seller pay the buyer’s closing costs could cause an inspection to fail, but it can! If the buyer requests repairs and the sellers agree, then typically the sellers must perform the repairs before close and those repairs are subject to buyer’s approval. This can create a loop in a transaction that causes all kinds of stress and problems with all parties. So, most real estate agents will recommend that the seller give a credit toward buyer’s closing costs in lieu of repairs. Instead of simply dropping the purchase price, which does nothing for the buyer’s pocket book in making repairs immediately after moving in, giving seller credit toward buyer’s closing costs for repairs puts money in the buyer’s pocket right then and there. It almost always satisfies the buyer. Problem is, if the seller already agreed when they accepted the offer to pay all or most of the buyer’s closing costs – now there is no room for this to get through repairs. There is an allowable cap to what the seller can pay toward buyer’s closing costs, so now one of the best ways to negotiate through repairs in the home inspection period – is gone.
- Increased Seller Costs Over and Beyond. One often recommended tactic of dealing with the buyer’s request for seller to pay closing costs is simply to increase the price. Say the buyer wants 10,000 in seller paid closing costs, then the seller simply counters the price 10,000 higher. However, this is not a one for one situation! Most of the time real estate commissions are based on the sales price and escrow and title fees are based on the sales price. It can add hundreds of dollars of seller costs. Once again, this is okay if it is the best or only offer on the table, but seller needs to be aware.
- Appraisal Risk. This one is rather obvious. The higher the sales price the greater the risk that the home will not appraise. If the seller wraps in the buyer’s closing cost request by increasing the sales price, run some numbers of the sale first to try to assess your potential appraisal risk.
5. So should the seller pay the buyer’s closing costs?
Yes, if it is their best offer. The majority of the time these sales still close! But it is important to know and understand all of the seller’s costs and risks as mentioned above, when they agree to pay buyer’s closing costs.May 31, 2019