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I ain't paying their closing costs!!!

I'm writing this post today to try and help sellers understand that they aren't really paying the buyer's closing costs. In my market, Poinciana, Fl. It is very common for the buyer to request that the seller contribute towards their closing costs. In fact, the last 15 or so deals that I have closed, were all 100% financing with the seller contributing 3% or 6% towards buyer's closing costs. It's just the nature of my market. Now that it's a strong buyers market we have to take these offers seriously or we may not be able to sell the property.

Now since this is so common and expected, I always bring this up at time of listing, to try to forewarn and educate my sellers. By educating my sellers, at time of listing, it makes it easier when these offers come in. When they do receive an offer, I want them to be prepared to counter offer accordingly, without getting caught up with who pays what. But you know, no matter how well informed they are it's inevitable that they say "I ain't paying their closing costs".

Mr. and Mrs. Seller, I'm here to tell you, that you are 100% correct, you are NOT paying their closing costs. In reality the buyer is financing his costs into the loan. They will end up on your side of the closing statement but the buyer is paying. It's important when looking at an offer to concentrate on the NET figure. This is really the only figure that makes any difference. How much money is going in your pocket at closing. Everything above that line is just a manipulation of numbers. Don't dwell on who's paying what. Concentrate on what matters: how qualified is the buyer and how much will I NET. By looking at offers this way you will have a much better chance of negotiating a deal. And that is money in the bank!

In my market, when a buyer is getting 100% financing and asking for a seller contribution, more than likely, they have no money. By pulling the closing costs, out of the offer, chances are they will not be able to purchase your home. So leave them in and raise the price accordingly. By conceding on the seller contribution we can more easily negotiate other items that may be important to you i.e. an "as is" sale and post possession.

So, my fellow REALTORS®, next time you have to present an offer asking for a seller contribution, help the seller to focus on their NET. This will increase your chances of having a successful negotiation and will increase the chance of your seller getting their property SOLD. But you knew that, right?

Posted by Bryant Tutas Broker/REALTOR(R) Tutas Towne Realty, Inc on 02/21/2007 11:41 PM

Comments (48)

seller contributions, negotiations, educational

48 Comments on I ain't paying their closing costs!!!

FEB

2007

Reserved Parking For "The Lovely Wife...TLW...ROAR!

Hubba! Bubba! Wink. Wink.

That's my comment...For now :)

RIGHT! ! !

The lender guidelines accomodate seller contributions. What more do we need to know?

Having closing cost paid partially or wholly by the seller increases the pool of buyers. THAT benefits sellers. Sellers can be funny. They don't mind negotiating a 95% offer, but won't pay 5% closing because they think that comes out of their pocket.

I love it when I present a VA contract with $ZERO down and all allowable closing paid by the seller. Sometimes they get plain angry. "NOBODY PAID ANYTHING FOR ME WHEN I BOUGHT THIS HOUSE 30 YEARS AGO.

I had a seller make a snide remark about "You VA guys have it good". My buyer, an intense young Navy Captain simply said to the seller. "You can have the same thing Sir. It comes with a one way ticket to Saudi Arabia" This was in 1992 when we were over their driving Saddam out of Kuwait. I never forgot it.

Thanks for the reminder, B. There is a reason that we provide "seller net sheets". The client needs to foucs on what they get, not how they give xyz away.

Lenn - That is a great comment. I lived in DC for about 6 years and have a lot of friends in special ops. People would go on and on about who they knew and what they did. A couple of my friends tell people that they get shot at for a living. It put a whole different perspective on things.

THANK YOU! CAN WE PRINT THIS ON THE FRONT PAGE OF THE NEWSPAPER?

Great blog again BB, I am repeatedly explaining this myself to clients here. The first time homebuyers here especially are looking for 100% financing plus no closing costs. Adding them into the contract is perfectly fine & does not affect the sellers but they still feel like they are paying them. They do, end up paying a few more dollars in doc stamps & title insurance though....

Thanks for the info for us Newbies. I have completed a few transactions with 100% financing; using the net sheet is a good idea to keep the seller's focused on the prize and I will use it more in the future.

Fran

Bryant, I advice my borrowers that are short on money or who are leaving themselves with little or no reserves in the bank to do this. By doing this the Seller can still net the same amount and they get to leave a little cushion in the bank to help out in the months that the money is tight, and can prevent foreclosures in some cases.

That's right Bryant - Rick actually prepares an Excel spreadsheet where they can enter numbers, percentages and commissions and get their NET amount on the bottom of the page. It's an easy tool, specially when your customers are not in-front of you (we have a lot of out of town sellers).

As always...very informative and helpful, Broker Bryant. Always good to let all parties gain insight into possibilities. Thanks for pointing that out

Awesome post, Bryant- We prepare our sellers up front, and even run a net-sheet scenario at the time of the listing, so they are aware that it may happen and that they should even count on it. Then when we do get the offer that does NOT request closing costs to be paid, it is a nice surprise.

FEB

2007

About to close on a townhome where my buyers will have just about all their closing costs paid by Mr. Seller.....

Great post, preparing your clients in advance is so critical. Another point on the subject, I always run it by the loan officer when working with buyers to be sure were are not jeopardizing the loan in any way.

Even from the financing side I try to educate buyers of the way it works. And I agree ten-fold, it's all about the net. Not only a good blog, but a nice reminder to help educate people. It's part of what we do. But you knew that, right:-)

Your absolutely right the only thing that matters is the NET in the pocket and everything else is Noise on the side. The contract is like a mold everything inside or around it is what develops the bottom line.

Bryant-

Another great post... the voice of experience. Just like most aspects of a transaction, education before the fact, by a trusted source, can alleviate anxiety and confusion. Unfortunately, I think everyone's seen sellers, who were not prepared by their agent, and the deal has been broken or almost, because they just didn't get it.

I've seen this a lot, here in Texas often the offer will come in over the asking price. Seller concessions are a little easier to explain in these cases. Many times it's the buyer who doesn't understand that he's going to be upside down on this deal for a good bit longer than if he'd just ponied up the closing costs to begin with. And 3 years down the road if he is wanting to sell...well, time to pay those closing costs.

It's also important to focus on the net when discussing our commissions. We always point out that it's not the difference in the commission rate you pay that matters as much as the difference in your net. If paying us 1% or 2% or 3% more than another agent net you 5% or 10% more on your net sheet and in your pocket - then what's the point of hiring the lowest bidder?

Lenn - great response from your buyer.

I have found that the only time I have trouble with this concept is when my sellers start to feel they are being "run over" in the other aspects of the offer.

It becomes my mantra, "Your net number remains the same as what you wanted,"

Good post!!

This post and comments are so intelligent I can't add much; so I will thank you for the post and ask Ines if she will share Rick's form. I have a system as part of our MLS but I'm not fond of it. Good stuff!

If the seller perceives value in the offer, they usually will not balk at the closing cost assistance. It's also interesting to see their thought process evolve from the point of listing to the arrival of the contract. Somehow those pieces of paper with $$ on the dotted lines makes a world of difference.

Hello sellers...your market has ended.

Excellent points. THere are many creative ways to structure deals to allow for sellers to pay costs. On the mortgage side the buyers always want to finance costs to make their dp go further. This is where teamwork with the loan officer, buyer, agent and seller is very important.

IT is about the net. When everyone understands that...it works.

Aesome post. I love the way you explain that the seller is not paying closing, that the buyer is financing closing. In a buyers market this is all to common and we must have to deal with it appropriately. It all boils down to our job as educators-WE must educate the general public on the entire process.

In a lot of cases, paying the 3 or 4% in closing costs for the buyers is still better than implementing a price reduction of $10,000 to move the sellers home. So in this market, sellers would be very wise to offer this. I've also heard of deals where the buyers take the "seller credit" and buy down their interest rate to save money on their monthly payments rather than use it to pay closing costs.

Great informative post!! We always do a net sheet from the beginning to every time the price/offer changes for that reason. But I like how you say everything above the line is a manipulation of numbers - I'll have to remember that. Wonderful article for us newbies.

Well good morning everyone. As always I appreciate you stopping by.

KEY POINT:

I to want to mention that my sellers never offer to pay closing costs in the listing. In fact I suggest to my sellers that we offer no concessions i.e selling bonuses, warranties etc. I have found that it is much better to reflect any concessions in the list price. If the seller is willing to contribute $5,000 then lower the price by that amount. Pricing is everything. If the buyer needs or wants concessions they will ask for them anyway and we can negotiate accordingly. The key to getting a listing sold in this more difficult market is the list price. Get it as low as possible.

I agree. The possibility of paying closing costs is never mentioned to potential buyers (unless we are in direct competition with a builder (who pays cosing costs) and the Seller agrees). Our Sellers are AWARE that they may need to pay, but we (of course) do our duty to negotiate for the highest possible price w/ lowest possible costs on their behalf.

I agree as most of my contracts for the past 2 years have also been 100% with closing costs (80/20). I go over different versions of the net sheet when I list so the sellers can see different scenerios. I also do this in advance so in case I represent the buyer as well, the seller already has all my "advise and opinions" on how to approach an offer when the broker is the intermediary. I'm currently in this situation and it went very smooth.

However, many times, no matter how many times you explain it's the net number, they still get hung up on the closing costs. I've started changing the way I present the offer to the sellers. I start by saying I have an offer in hand that currently nets you this amount, and then I give the specifics. It's helped.

Wow. I want to look at this. I think that you are right in one way, but I think we need to look at it from the sellers point too. Many of them think that they are paying the closing costs. I would agree with them if we are looking at bottom line. With your assumptions then the seller is paying for the realtors side of things to. Now I do not know what you charge in FL, but here in IL it is around 5 to 6%. I do not think you can tell the seller, "you are not paying me, the buyer is out of their money". If you do say this I think you could really be up a creak when you start off the whole point with the bottom line is what you look at.

Now I agree that the sllers shpould give 3 to 6& for closing cost. I do this even if it is not 100% financiang. I tell me FSBO sellers that by doing this they are more likely to sell their home. I have no idea if this would have resulted in more money in their pocket. Soetimes it does and other times it does not.

Again, I would ask people to look how they say things and the assumptions behind them.

Best of luck.

Well as a new comer and a buyer's agent, I must say I agree with all of you to a point. Educate the seller, and also let them know that sometimes they may have to pay closing cost without increasing the listing price. This depends on how fast they want to sell and move on. Most buyers that ask for closing cost do not have it. Most times increasing the price to make the numbers work for the seller kicks the buyer out of the game. The price of the house is now too high for their pre-qualification. They can no longer afford the house. We all know that buyers are always interested in that house that is just a little above their means and want the sellers to come down.

In this buyer's market the seller has to be willing to give just a little. The more we sell the better for all.

Bryant, the thing to consider when listing the home at a low price and then adding the closing costs back on to the price later is the buyers usually think that they are being ripped off. Even when there is a full price offer with the seller contributing $5000 in cloing costs, the buyer perceives it as them paying full price and usually resents the fact that I couldn't get the seller to come down from his price. Sometimes buyers seem to take it as a given that the seller will pay closing costs and considers that the starting point. Both agents really need to educate their respective clients in order for everyone to appreciate what's going on.

Ok so some of you are missing the point. I list homes at market value and I also use "range pricing". My point on the listing side is why price a home at $200,000 and market that the seller will contribute $10,000 towards BCs when it would make more sense, exposure wise, to list at $189,900 and offer no closing costs. Once we have showings and offers we can then negotiate accordingly. The key to getting a listing sold in this market is to have it priced well enough that people will look at the property. Negotiations will take care of themselves. Gotta get them through the door.

I ONLY work with sellers, frankly how the buyer feels about it, is not my concern. As long as the property is priced properly, the buyer will have no issue paying the price even if it has to be higher than list, to get his cost paid.

I do agree it is about educating the sellers and the buyers.

Being the 30th something comment, there's not much I can add that wasn't said above. I do like how clear and easy to understand for everyone your post is and agree, can we put this on the front page of our local newspaper for everyone to see!!!

That is so useful to keep in mind, and I find often seller's agents don't really grasp it and in turn their sellers don't grasp it. Sometimes when I feel doubtful, I even go so far as to do some of their math for them and have that handy to help them get it.

I presented an offer like this for one of my buyer's to the seller's agent. He had been in the business for about 20 years and tried to tell me that it wasn't ethical to inflate the sales price of the home to ask for closing costs back from the seller! That's right, we were offering full price on a fabulously priced listing yet we inflated the sales price by 3% to ask for 3% back. The listing agent also told me that there is no such thing as a 100% loan. He was arguging with my buyer's mortgage broker for about an hour on the phone. He was actually an associate broker too. It suprises me each and every day the people that we run into in this business!

Wow, times are a changin', get on board or get out of the way!

I have some concerns about buyer presumptions of closing costs based on something that happened to me a couple of weeks ago. A young couple that I know contacted me about a fixer upper property they had seen priced at $239,000k which would price about 20K higher in good condition. They called at 8 pm in the evening and by the time they were able to look at it the next day, it was sold with 2 offers so we looked at 2 other properties, both almost up to the maximum they qualified for. One was nearly double the size of the other and very attractively priced. They would have room for their baby and then some. We wrote it up and asked for seller contribution of closing costs.

Unbeknownst to us, the house was in preforeclosure. This was left out of the remarks at the suggestion of the listing broker. I advised my clients of this and let them know that the counter-offer would give them $2000, not the $7000 they were hoping for. They backed out of the deal because they were very close to their maximum and were very concerned about their finances. They have told me they want to clean up their finances and wait. We could have boosted the sales price (which made them uncomfortable) or found something smaller (but they were very set on the size of home they'd seen) or looked in another area (but they only wanted the town they were living in or the one immediately next door.) They also were upset that the seller would not contribute to closing costs even though I told them repeatedly that preforeclosure means there is no money to contribute. Thoughts?

Joe, that is unbelievable!! 20 years in the biz and doesn't know the bare basics of real estate. That's scary. I hope he's not training agents.

Irene, I think it is imperative that buyers and sellers are educated. If a property is priced in line with the market AND closing costs contribution are not normal for that area then it would be expected for the seller to want a higher price if they are going to pay buyer costs. Buyers need to understand that their closing costs are THEIR closing costs. If they don't want to or can't pay them then they become a part of the deal. The seller may or may not want to increase the price to cover them. It sounds like your buyers have unrealistic expectations.

Dave, you are correct that it's all about the presentation.

Again I really appreciate everyone participating in this discussion. It's how we learn

A clear, but simple, explanation that any selles SHOULD be able to understand. We are seeing many seller concessions here as well, adn often it is offered up front without the buyers having to ask.

Thanks for another good lesson, Bryant.

Jeff

I second Carole's comments..both of them! Would Ines be gracious enough to share that spreadsheet of Rick's?

Thanks for another good post Bryant.

FEB

2007

Joe's story was amazing. I can not believe how someone could be around that many years and be clueless.

Hi Bryant:

Thanks for the prompt response on my comment yesterday. I agree that buyers and sellers need to be educated about market value and closing costs. Seller contribution of closing costs are common in this area but since they wanted fast movement on the property, the listing agent left that out in the price calculation when they put the house on the market. Even if we did a price bump on the house, it likely would have had no problem with appraisal. I think part of the problem stemmed from the loan officer telling the buyers that they should get seller contribution of closing costs. Improperly interpreted, it might sound like a requirement. Lessons learned!

I'm glad you all find my story amusing! :) It was so unbelievable at the time - it seemed so easy to understand to me. He actually laughed at me at one point and said that I wasn't going to be in the business much longer if I went around writing these type of offers for my buyers.

Darlin' (Broker Bryant)...

Ooops. I forgot to come back here and leave a comment :)

Consider that your comment...But you knew that right? SVW.

TLW...ROAR aka Your "The Lovely Wife" wink. wink.

FEB

2007

You might consider entering this in the CARNIVAL: The Economics of Real Estate Group

JUN

2007

You are 100% RIGHT. a lot of times the Realtor is not aware of this because they are not doing the financing and they are not sure what the investors guidelines are.

MAR

2008

Exellent idea, bringing this up at the listing table is the best way so when the offer starts coming in they will know how you are going to handle it and help them net what they are looking for.

JUN

2008

I have been trying to find an answer to the Nehemiah question I have for a while but no seems to be able to help. I recently graduated from Real Estate School and will be taking the state exam probably this week so be kind as I know I do not know a lot about Real Estate. My question is in regards to sellers being notified or being made aware that the buyer is using Nehemiah. When we were selling our house 3 years ago, we made it very clear to our listing agent what the bottom line on our net was supposed to be and no less. When we arrived at closing, we were hit with another $500 charge to Nehemiah thus reducing our net proceeds. We did not agree to this before hand and in fact were not even told about this until we were sitting at the closing table. As we had already reduced the price by $14,000 and contributed $3000 dollars toward closing costs, we did not feel obliged to offer any more money to the deal. After threatening to walk on the deal, the buyers representitive offered to pay the fee. From what I have read about the Nehemiah program, we should have been told before hand and agreed to this concession. Am i correct and what if any options did we have after closing? Who was responsible for this lack of information to us as sellers?

MAY

I wonder how many of these 2007 100% Buyers are now selling short or have been foreclosed?

Sharon

OCT

From your lips to the seller's ears! Even young people have issue with the words"seller assist", the the older folks are having a lot more trouble with it. They may not have bought or sold a home in 50 years, so this is a totally baffling concept to them. Your quote of"i ain't paying no closing costs" cracked me up.

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