We just listed our home for sale and our agent informed us that buyers in our price range are going to ask US to pay THEIR closing costs....I was floored. I have never asked anyone to pay my closing costs when I have purchased any of our homes and certainly do not have much interest in paying them on a buyers’ behalf. I am going to have my own costs to pay, without paying theirs too. We do not feel like we should pay someone to purchase our home. The whole thing just does not make sense to us and when we asked her why, she just said, “it is the way it works now-a-days.” I agreed and just moved on, but it still does not sit well with us. Could you please give us a better explanation of why we will be required to pay the buyers’ closing costs?
Les and Joanna, Grand Junction
Les and Joanna,
I can assure you, you are not the only sellers I have heard this from, “if they can’t afford to pay their own closing costs, they certainly can’t afford to buy my home.” Seller paid closing costs must be somewhat of a newer trend, as it is my sellers who are generally over the age of 50 that have a real disdain for seller paid closing costs. They are fundamentally opposed to it. I really believe most of the time it is not the costs involved, it is the lack of understanding and the generational gap of a time when you just did not ask for help. Remember, you are not required to pay the closing costs, but let me see if I can make a case for why you should!
There are a few reasons why this has become quite the trend in home buying. First, the lenders will generally allow a seller to pay up to 3.5% of the homes purchase price towards the buyers’ closing costs. If the seller agrees to participate by paying the buyers’ closing costs, this lessens the buyers’ “cash burden” at close and thus allows them to purchase the property with less money out of their own pocket. This leads us to our second reason this practice has become so vogue, many buyers in today’s market are “cash poor.”
Lets face it, as a society we largely live hand to mouth and save very little, although our saving habits have become somewhat better since the fiscal crisis of the past several years. Statisticbrain.com reports (numbers verified 12-26-2013) the average American family has a savings account balance of $3,800 and 25% of American families have no savings at all and 40% of families have no plan or savings for retirement! I think it is safe to say that we are a “cash poor” society and the more cash it takes to purchase a home, the fewer buyers there will be who will be able to buy. It really is quite simple, you are paying their closing costs to lessen their cash requirements at close and thus increasing the size of the overall buyer pool. By saving the upfront cash expense of closing costs, the buyer may also be wanting to make some improvements or updates to the home after closing and keeping some cash in reserve will allow them to do just that. Keep in mind that it is by no means, “every buyer” who “needs” the closing costs paid on their behalf. Many buyers choose to have their closing costs paid by the seller, as this allows them to “roll” their closing costs into their loan.
By rolling their closing costs into their loan, a loan that they likely have at around 4%, it requires them to take less cash out of other investments that may be performing at a higher rate of return than the 4% they are borrowing at. If I have an investment at a 10% return, then why take money away from that investment to pay down a loan at 4%? As a society we have become obsessed with our “rate of return” on our investments. In today’s world if you tell someone to take money away from a 10% return investment to simply lessen their borrowed amount on a 4% loan, they would look at you like you were crazy and I must admit, there is some truth to that line of thinking.
As you can see, there are several reasons why buyers will ask you to pay their closing costs and you can be assured that if you refuse, many buyers will move on to another property, especially in the under $300k price range. I always advise my sellers to pay the closing costs and negotiate from a bottom line sales price (their net), rather than getting caught up in who is paying what closing costs. Just ask your real estate agent to give you a net sheet so you can see what your walk away number will be and negotiate off your net amount, as this is the only number you should really be concerned about. I hope this helped.
The Kimbrough Team
RE/MAX 4000, Inc.