Closing costs, as I discussed in a recent post are no small chunk of change. What many buyers don’t realize is that there are ways to negotiate that the seller pay some or all of your closing costs. While it may sound too good to be true, it can actually be a win-win situation if approached properly.
Think of it this way. The seller wants to sell his or her house easily—and for the best price. The buyer wants to buy the house that they want and have enough money left over to pay other bills and eat now and again. Negotiating seller paid closing costs can be a great way to achieve everyone’s goals at once.
Let’s imagine that Jim and Nancy have just listed their house for $395,000. Dan wants to buy their house, but is strapped for cash after saving up for the down payment. He is concerned about how he can afford closing costs on top of that. If Dan wants to ease his up-front burden, he can approach Jim and Nancy to see if they would be willing to pay some or all of the closing costs for him. Here’s how I would suggest he approach this:
1) Dan should structure his offer carefully. He should work with his agent to determine a fair price and then build closing costs on top of that price to arrive at the offer amount. This will ensure that Jim and Nancy are not taking a hit on the net sale price.
2) He should make sure that the specific amount of seller paid closing costs that he is requesting is written into the original offer. This dollar amount can be estimated by the lender and can cover closing costs ranging from attorney fees to prepaid items (escrows, taxes, etc.). It needs to be a specific dollar amount, as some costs are optional or change based on the date of closing or other factors.
3) Dan should try to be as flexible as possible in other areas of the negotiation, such as timeline for closing and small fixes on the house. Of course, if the inspection uncovers things that don’t pass, he should speak to his buyer’s agent for options to resolve those items to his satisfaction.
Here’s how Dan wins in this scenario. By negotiating that the sellers pay all or a portion of the closing costs, he can save a significant amount of up-front costs. This means that he can keep more cash in the bank as a cushion for any surprises as a new homeowner. At a time when his savings are taking a hit, this arrangement can be well worth the slightly higher monthly payments he will have over the course of the loan. The slightly higher payments are due to the higher offer price that he committed to as part of the negotiation with the seller.
The great thing about this arrangement is that Jim and Nancy are also winners. Because of the way the offer was structured, the net price of the home will stay the same. Their flexibility will help facilitate an easy sale with a buyer that otherwise may not have been comfortable buying their home.
It’s really the lender who has to watch out to make sure that the price of the home isn’t too artificially inflated by this arrangement. Lenders do set limits on the amount of “seller concessions” (another term for seller paid closing costs) allowed. Additionally, the house must appraise for at or above Dan’s offer price in order for the deal to go through. That being said, it should all work out as long as the offer is structured reasonably and the seller isn’t paying more than the percentage cap set by the lender.
When you find the house that is right for you, don’t let closing costs prevent you from making an offer. Work with your realtor to figure out the best offer structure and think about negotiating seller paid closing costs to ease your immediate financial burden. Seller paid closing costs can get you into a home faster—with more peace of mind and more cash in the bank!
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