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Buyers Win If Seller Subsidy is Stacked (even if the price is increased)

By
Real Estate Broker/Owner with Northern Virginia Homes - FRANKLY REAL ESTATE Inc

Ok, this is kinda tricky to explain, so bear with me.

I feel strongly that ultimately the seller should pay for all (actually "most") closing costs. But not in the way that you might be thinking. And this type of post will lead to the 101 hyper technical "but what if" scenarios and counterarguments.

I'm not talking about "Negotiate strongly and beat down the seller by getting closing costs thrown in, heck this is a buyer's market!"

I'm talking about "The seller should care about their NET." Once the net is established, go back and ask if the price can be adjusted (INCREASED) to include closing costs.

Example: $500,000 with 0 closing costs vs $510,000 with $10,000 back.

Why? The higher the recording closing price, the better for the buyer. Ie $510,000 1) In the short term for comps: The higher it records on the county records and the MLS the better it is for "comps." In other words it helps the next similar unit close for higher, which is better for the buyer (ie more of the cheesy "instant equity"). Note that the MLS DOES show the seller subsidy (closing costs paid by seller) in Virginia, DC, MD, but a) not everyone sees it (even though FranklyMLS nets out all closing costs when showing sold prices). b) not all appraisers will adjust 100% for it (thus helping the next unit appraise for higher).

2) Better loan. For some people adding back in 2% in closing costs, can help people jump from a 15% down loan to a 20% down loan, thus dropping the rate significantly.

3) In the long term: since the county records do NOT show the closing costs, this helps the buyer when they sell the unit in a few years. Many do-it-yourselfers and data hounds will say "well you bought it for $510,000... therefore" instead of "well you bought it for $500,000... therefore." I would rather make it look like I spent more (and in essence, with all the closing costs, you really did spend $510k, so why not have people see that number?).

Common counter-arguments:

1) Some will say this artificially inflates the marketplace and might lead to a subsequent crash. Answer: I'm talking about a benefit to the individual buyer. A buyer agent's job is to do what is in the best interest of the client, while being legal.

2) Taxes will go up. Yes, perhaps. Maybe $50 a year, big deal. Buyer tip: See post on NOT using Tax Assessments to value a home) Seller tip: Since some buyers DO use this, the HIGHER the tax assessment the better, so think twice before fighting to get it lowered, see post)

3) Seller might have to pay the commission on the seller subsidy. Yes, this might be the case. The buyer can offer to pay the difference. Or skip the idea of asking for more seller subsidies after the fact, and ask for it up front in the initial offer.

Things to watch out for:

1) Don't make the seller subsidy too high. This isn't free money. Sometimes a lender will say "sure we can use up 3% or 4%", but that defeats the point. Don't start buying points if you weren't already planning to.

2) The contract reads "Up to X in seller closing costs." If you put a number that is too high, then the rest goes back to the seller. You can maybe add in your contract "unused closing costs will result in a drop in the contract price, with the same net to the seller." Or get from your lender the closing cost estimate and leave $2,000 in wiggle room. Also if you need to use up the funds, you can count your home inspection and sometimes up to a year in condo fees. Worst case scenario, you can do a 2-1 buy down (more complex, prepays part of your mortgage) to use up funds.

3) Watch out if you ask for a credit for home inspection items, you don't want your credits to go so high that the lender won't allow it.

4) This might get tricky with how the appraisal is handled (it can actually help), but I can go into that next time as that can take a long time to explain.

Sorry if this was a little complex, but it is something that I strongly believe in, and I think most of you will get it. Feel free to add more "well, what if..." I did it for my personal home, and I would do it to help my clients.

Written by Frank Borges LLosa
Broker FranklyRealty.com
Owner FranklyMLS.com

Cash photo by emdot

Comments (7)

Vickie Nagy
Coldwell Banker Residential Real Estate - Palm Springs, CA
Vickie Jean the Palm Springs Condo Queen

Great post! I like the way you think. I feel certain this is worthy of a re-blog or two.

Feb 11, 2010 11:41 AM
Monique Combs
Royal Shell Real Estate - Bonita Springs, FL
Royal Shell Real Estate - Monique Combs

Frank ~ Great mind! Thanks for sharing your wealth of knowledge.

Feb 11, 2010 11:44 AM
Cara Pearlman
Frankly Real Estate, Inc - Bethesda, MD
Realtor - ABR, SFR

Frank - love #2 under things to watch out for. You always have a unique point of view and a new way to get the best deal for the client. Maybe I'm too honest, but I would rather put it up front then wait until after the initial contract is ratified. To me the only way it makes sense to wait is if you get a higher appraisal value in and realize that you have some more room. 

Feb 11, 2010 11:13 PM
Michele Connors
The Overton Group, LLC Pitt & Carteret County - Greenville, NC
Your Eastern North Carolina Realtor

ok, what about the disclosure conditions now on new HUD..and what about the likeliness of false inflation which got us in to trouble a few yrs ago.. I know RE is local, so to argue your point here in NC we protect the consumer (buyer or seller) and our mls requires us to disclose ALL monies negotiated. Closing costs, prepaids, allowances. etc. We also document the type of loan the buyer gets ( or cash) as to understand the seller concessions.

Thought provoking but for our area even most  short sale and foreclosures are entering mls and additionally appraisers are using them as information on appraisals.

On the other hand, yes if cash is low and buyer is qualified to purchase higher to get allowable seller contributions great..That is nothing new. Just be sure you dont rock the boat and getthat purchase price higher than it needs to be (you never know when an emergency will arise-they have to sell and they are upside down without equity, it can bite them and you might look bad)

Feb 11, 2010 11:30 PM
Rick Phillips
Appraisals Guaranteed - Alexandria, VA
Expert & Customized Valuations

Frank, not to be contrary, but look at the appraisals I've done.  The seller concessions get subtracted right back out.

Feb 18, 2010 03:35 PM
Glenda Cherry
Keller Williams Realty - Herndon, VA
Realtor / Photographer

This is the same "new idea" that lenders have been trying to push for the last couple of years ... it sounds great on paper, but the appraisal is always going to be the sticking point.  Until the appraisers stop being afraid of their own shadows and start doing honest appraisals that are in line with the actual market conditions, nothing will change.

Feb 23, 2010 12:35 PM
Matthew Ryan
Frankly Real Estate, Inc. - Alexandria, VA

This is a concept that I whole heartedly agree with. Why would a buyer want to pay cash at closing for anything other than down payment. If you aren't applying it toward the down payment then it is not helping your LTV. That is the most important thing in my opinion. The lender sees the value of the house as the sale price. The amount of the loan compared to the sales price can not only effect your interest rate but at 80% LTV you can stop paying that MIP which is a goal I had as soon as I bought my first home. I would like to take this concept one step further and say that I believe the public would be served better if the seller paid all closing cost all of the time and the buyer paid their own agent at closing. The difference in cost to both parties would be at least in VA almost nothing. Finally buyers agents would have to show that they are worth being paid at all, and buyers would finally be able to decide for themselves how their cash was going to be spent, down payment or paying an agent. I believe that the ABR designation means something and that agents who say that they are buyer agents need to start acting like they really are the buyer's agent. Keep the good ideas comming Frank!

Mar 16, 2010 12:06 AM