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Selling 101: Why Should I Pay For Buyer's Closing Costs

Hand Holding CashIn each real estate transaction, there are buyer's closing costs, as well as seller's closing costs. But increasingly, buyers are asking sellers to cover their closing costs. Why should sellers pay for buyer's closing costs?

The main reason is that this is purely an accounting move. With the way we structure purchase agreements, it is more-or-less irrelevant if the seller pays the buyer's closing costs. I'll give an example below:

Let's say you have a home on the market for $200,000. You receive an offer for $190,000 and negotiate it up to $194,000. Let's say that the $194,000 is acceptable to you and you accept their offer. From the $194,000, you'll pay your agent's commission, along with various other seller's closing costs. If you don't have a mortgage, you'll then take a net of about $180,000. (these numbers are very approximate)

Now, let's say you have a home that the buyer offers $200,000 with 3% of closing costs. This would net the you $194,000. If this is an acceptable number to you (which it was in the above example), you'll still accept this offer. From the $194,000, you'll pay your agent's commission, along with the same various other seller's closing costs. Again, if you don't have a mortgage, you'll take a net of about $180,000.  The same as the above example.

The bottom line is that whether you pay for buyer's closing costs (example #2) or you don't pay for buyer's closing costs (example #1), you'll end up with the same amount.

Why do buyers ask for closing cost assistance then?

Handful of Paper MoneyThe main reason that buyers ask for closing costs is this: cash in hand.

In the above example, if they are taking an FHA loan on the house, they are required to come up with a 3.5% down payment. That's approximately $7,000 in the above examples (it varies slightly since the first example has a slightly lower gross sales price). They are also then having to come up with $6,000 for their closing costs. That brings their total expenses to about $13,000 to purchase your home.

If they ask for closing cost assistance, they are effectively financing their $6,000 of closing costs into their mortgage. Their mortgage would be $6,000 higher ($200,000 vs $194,000) increasing their monthly payment by a few dollars per month (about $29 per month based on 4.25% interest on a 30 year mortgage). But this leaves them with more cash-in-hand.

 

What this means is that the buyer can purchase a home sooner than later. They don't have to save up the extra $6,000 to purchase a home. This is all at the expense of a slightly higher monthly payment, but most buyers are ok with that.

Steven Hong - RE/MAX Results 
REALTOR, e-PRO, GREEN, Old Home Certified 
7700 France Ave S #230, Edina, MN, 55435 
612-990-9009 (cell) 
952-915-2252 (office)
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