Most buyers genuinely enjoy looking for homes, but once the time comes to begin the negotiating process, many neglect to consider one important calculation that's important in understanding how a seller may view their offer on a particular home.
Of course, having good buyer representation from a competent real estate agent helps a lot, but I've encountered many buyers that become so overwhelmed with information while shopping for a home that they neglect to consider the bottom line of their offer.
Quite often, buyers in this market are asking sellers to pay all or at least a big part of their closing costs. Obviously 100% financing is not nearly as common as it was only a couple of years ago, so it seems that it's become even more common for buyers to ask the seller to pay all, or at least part, of their closing costs. There's nothing wrong with doing that AS LONG AS buyers keep in mind the concept of NET OFFER PRICE.
The most important thing to consider from a price standpoint when negotiating an offer is the NET OFFER PRICE, not the actual contract sales price. Far too many people focus solely on the price they are offering and neglect to factor closing costs into the big picture. Unfortunately the seller and their agents never neglect this, so be mindful of this important calculation:
For example, let's say that three buyers are competitively bidding on a home listed at $150,000:
- Buyer A offers $148,000, but asks the seller to pay 5% ($7,400) of the sales price towards closing costs.
- Buyer B offers $145,000 but only asks the seller to pay 2% ($2,900) towards closing costs.
- Buyer C offers $144,000 but doesn't ask the seller to pay ANY closing costs.
From the standpoint of money alone, which buyer submitted the best offer? In order to determine that, all we have to do is deduct the amount of the closing costs from the offer price:
- Buyer A's NET OFFER is $140,600 ($148,000-$7,400).
- Buyer B's NET OFFER is $142,100 ($145,000-$2,900).
- Buyer C's NET OFFER is $144,000 ($144,000-$0).
Based on this net offer price alone, which offer would you accept if you were the seller? Obviously the SALES PRICE is not as important as the NET OFFER PRICE to a seller. Assuming the seller was choosing the best offer on NET PRICE ALONE, Buyer C's offer would clearly be the better offer, despite the fact that the sales price Buyer A offered was $4,000 higher.
In reality, it's important to note that sellers and their agents often consider other factors besides just the net offer price when determining whether or not to accept an offer. Those might include (but not be limited to) variables such as the closing date, type of financing the borrower is securing, any repairs the buyer may be asking the seller to complete, as well as a host of other factors that will vary from one transaction to the next. However, this blog is merely addressing the SELLER'S NET from the standpoint of total sales price minus closing costs. Regardless of whether or not it's the ONLY factor a seller may be considering, it's certainly important.
And it's also worth noting that this NET OFFER PRICE doesn't take into account other costs a seller will have to pay, such as agent commission, prorated taxes, title policy and other seller closing costs that are typical. However, in the majority of cases, those will more than likely be the same unless the buyer chooses to pay their own title policy. In other words, seller's actual net will be less than the examples above. This is only meant to illustrate how seller's evaluate individual offers taking both sales price and seller paid closing costs into account.
It's a pretty simple concept really. If a buyer offers $150,000 and asks the seller to pay $5,000 in closing costs, it's the same thing as offering $145,000. This "NET OFFER PRICE" is what's important to the seller, not necessarily the asking price itself.
Of course, sometimes buyers who ask for a large amount of closing costs actually offer MORE than the asking price of a home. In certain cases, this may cause a seller to decline or counter an offer because they may fear the home will not appraise for the higher price. Every situation is different.
So buyers, keep this in mind when deciding what price to offer on a home if you're asking the seller to pay closing costs. Sometimes sellers may counter the offer with a higher price, and sometimes they may counter by offering to pay less in closing costs (or both). Understanding this basic concept will help you to better understand the process and possibly make better decisions. You have to see things from the seller's perspective in order to really understand the numbers. It's certainly not uncommon to ask a seller to pay closing costs, especially on homes priced under $200,000 in the D/FW market, but all buyers should realize this is how a seller will view the net price of the offer.
Please note that I am not a licensed realtor and do not directly participate in the negotiating process. However, I have found that most buyers who understand this concept tend to fare better when negotiating offers with sellers. Every buyer should take advice from their realtor when considering what price to offer on a particular home, just keep this in mind when doing so.