Should the Buyer ask the Seller to pay for their closing costs?
Most people would say yes, you should ask the Seller to pay for your closing costs? How do I know this, because it hear it all the time. Almost every time a new buyer comes into my office and we discuss offers, they say I want the Seller to pay for my closing costs.
And that sounds awesome. But I always point out to them, the Seller is never really paying for the closing costs. What the Buyer is really doing is financing the closing costs.
Of course their response is usually, my parents told me to get the Seller to pay, I don’t want to finance them. Then I will always go through my scenario and tell them to go home and tell their parents how the parents really financed their closing costs.
Now hang with me, I will also show you why there are scenarios where this is still not a bad idea.
Here is the scenario. I am a Seller, I have my house on the market for $210,000. I want 210k, but I know in my head my absolute bottom dollar is $200,000. I will hold onto the house instead of selling it for anything less than that.
I get an offer for $203,000 and the Buyer is asking me to pay their closing costs of 3% ($6k). So the offer is for $203k, but there is no way I am going to accept this, why, because if I am paying 6k in closing costs then I am really only getting $197,000, which is below my minimum.
I am going to counter offer, would you like to buy it for the $203k with me only paying 1.5% or would you like $206k with 3% closing costs. Of course I would also sell it to you for $200k with no closing costs because all of them get me the same thing.
So if you are the Buyer, what is really happening? What is really happening is you are financing the closing costs. Now you may think you beat the Seller up and got every dollar that you could have and then got the closing costs on top of that, but I assure you, that did not happen. If you can get them to sell for any price and include closing costs, you can get them to sell for that price less the closing costs.
And if you take that $6k at 4.5% interest rate over 30 years? That is really an extra $11,000 over the life of the loan.
When does it make sense to get Seller paid closing costs?
There are times when it makes sense to get the Seller to pay for your closing costs. If you are an FHA buyer who just really needs help because you don’t want to drain your bank account, then it may be a good time to get the Seller to “pay” your closing costs. A second time is if you are planning on only staying there a few years, say you have a kid graduating school in 5 years and you plan to downsize after that, then maybe you want to keep an extra 6k in your account as the interest you pay on that in 5 years won’t be that large.
Now you know the truth about Seller Paid Closing Costs! Go educate the masses.