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Seller to Pay How Much? Is That Really Necessary?

By
Services for Real Estate Pros with Mort Genius Brands

  

You don't often hear this question from homebuyers; but, perhaps you should raise it yourself. Counseling the buyer as to the best way to structure the transaction can save the buyer thousands of dollars and sometimes can save the sale!

The lowest rate always carries the highest closing costs.  This adds to the total acquisition cost of the property, which impacts initial and future equity.

You may argue that it does not cost the buyer when the seller is paying the buyer's closing costs; but in reply I would challenge you to show me a serious seller that would accept $100,000 paying $5,000 closing costs but would not accept $95,000 paying no closing costs. The seller just receives more or less. Only the buyer is on the paying end of the transaction in fact.

In this current odd market where appraisals are often a problem, sales professionals may want to consider whether or not "loading up the sale price" is actually going to benefit the buyer; and, even if it is the buyer's best choice, is it the only way to make the deal work. If it is, then ok-go-for-it, but be aware that you have a thinly qualified buyer, so there's no maneuvering room with a low appraisal.

Related to this is the advice you may be providing your seller, both at the time of listing the property and at the time a contract is offered.

At the time of listing you may want to engage the seller in a discussion of "list price strategy." For this discussion you will need to show the seller alternative list prices required to achieve the desired seller's net given various levels of seller-paid closing costs. The range of alternatives will be from "bare bones" price (no seller-paid costs) to a "fully loaded" list price (seller pays the max, maybe 2 to 3 points + CC). One good reason to do this is that it will disarm the seller who doesn't want to "pay" closing costs, since each scenario delivers the exact same seller's net.

There are pros and cons to either extreme of a list price strategy. A more competitive price may deliver greater activity, but you can almost bet that any offer in the first-time homebuyer price range will ask for seller-paid closing costs anyway. And, what are the consequences (buyer reaction, appraisal, lending guidelines) if the seller counters at a price above the list price? The "fully loaded" list price may cause selling agents to pass you by, but there is more room to negotiate and it's easier to come down than go up on the price.

So, sure enough, a low offer is made. And, sure enough, the buyer is asking the seller to pay a large amount of loan fees and closing costs.  The seller is very motivated but can't live with the net. What to do? If you counter on the amount of seller-paids, the buyer may not qualify for the loan. Countering at a price that leaves the seller-paids alone may be more acceptable to the buyer.  But will the property appraise; and, is the low rate/high cost choice really the buyer's best choice??

What I have presented here is the dilemma, not the solution. The solution is for the buyer's agent or the buyer's loan counselor to have counseled the buyer as to which rate/cost combination is the best choice. The best choice is not someone's opinion.  My research has found that neither is a thumb rule reliable (so, be careful!). The "financially correct" choice can only be found using technical analysis.

As additional information I have posted a Best Rate Choice Analysis here> http://e-linq.com/Examples/BesteRateChoiceExample.xls

Each of the transactions summarized results in the same net to seller. Notice that, although the buyer expects to live in the house 7 years, the results do not show the lowest available rate to be the best choice. The rate schedule used ranges in loan discount points from about 2% to -2%. Different levels of loan discount yield different results.

Show All Comments Sort:
Russ Ravary ~ Metro Detroit Realtor call (248) 310-6239
Real Estate One - Commerce, MI
Michigan homes for sale ~ yesmyrealtor@gmail.com

You are right so many deals are contingent on the appraisals you need to be tight on the offer price

Aug 16, 2009 02:47 PM
Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Looking to see what the buyer is going to qualify for is an important piece of the puzzle.  You raise an interesting dilemma.

Aug 16, 2009 04:23 PM
Roland Woodworth
Blue Cord Realty - Clarksville, TN
Benchmark Realty

We need to compare apples to apples.. The rate alone as you pointed out is not alway the best deal.

Aug 16, 2009 04:24 PM
Sharon Alters
Coldwell Banker Vanguard Realty - 904-673-2308 - Fleming Island, FL
Realtor - Homes for Sale Fleming Island FL

Congratulations on the Gold Star! This is a very straightforward explanation of something that is confusing to buyers and even some Realtors.

Sharon

Aug 16, 2009 04:59 PM
Harold "Hal" Place
A1 Connection Realty, Inc. - Sun City Center, FL

Morning E W,

Good post. Our objective is to get to the corner and close the deal to the satisfaction of all parties. In the past we have had the good fortune of dealing with Cash buyers. Because the Boomers are not in our market place we are beginning to see more mortgaged sales. I expect the demand for creative financing, as in your examples will come next.

 

Aug 17, 2009 12:24 AM
Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

Every FHA offer I get has at least $3000 of closing cost. If you represent the seller in FHA price range, this should be part of your pricing strategy. It is not a "loading process" for the buyer, most often it is necessary especially when the average age of a buyer these days is 28.

Aug 17, 2009 01:50 AM
Home Loan Search.Online
Home Loan Search Online - Newnan, GA

It is good to see the program is working with Vista and the latest Office software.

Aug 17, 2009 02:44 AM
Russell Benson
Old Republic Title - Norman, OK
We'd love to close your deal at Old Republic!

Every listing I have has closing costs built into the price.  Why not?  They're going to ask for it so why not be proactive and show the buyer and their agent that you do not need to beg for closing or wonder if your offer will be rejected due to the fact you asked for closing costs.  Guess what?  This strategy works every time.  Sellers need the advantage because now there are plenty of good condition homes for sale where years ago the choices were much more limited.

Here in Oklahoma we see many houses where the buyers offer was "loaded" up with down payment, closing costs, etc and of course the homes were appraising without worry (big surprise).  I kind of looked at them like a future distressed sale and always worried about what these folks would do when they decided they wanted to move up to the next bigger and better home only to be made aware that they have very little, if any equity.  Not to worry though because I did not handle buyers that way but I saw plenty of my listings sell for well over asking price to cover costs.  What a shame.

Just yesterday I visited a homeowner who purchased in 2007 just before the market went south and of course he paid top dollar for this new home and of coursed used an 80/20 product so guess where he's at now?  You guess correctly, he owes more than it is worth, probably $7,000-$10,000.  Not a whole lot you can do about it except be polite, professional and get the hell out of there, lol!

Aug 17, 2009 03:57 AM
E. W. Lester
Mort Genius Brands - Fayetteville, GA

To all - Thank you for the 100% positive comments and great feedback!

I see that many of you are Thought Leaders, so your total acknowledgement of the dilemma is heartening, as are your additional insights.

I wonder who would also agree that this "phenomenon" of seller-paid costs is at the heart of the dilemma and actually works as a disservice to all concerned. If we acknowledge that seller-paids are actually buyer-paids in the final analysis; then, does not this notion of the seller paying stuff only create a "smoke and mirrors" effect?

Of course, it is lending guidelines that make seller contributions necessary. But why not just add up the total acquisition cost to the buyer and base the LTV on that number. Why involve the seller? What part of real property is loan costs anyway...a chattel? ;)

Aug 17, 2009 05:21 AM
Gene Riemenschneider
Home Point Real Estate - Brentwood, CA
Turning Houses into Homes

The problem is there are so many 1st time buyers who are struggling to get 3.5% down need those closing cost paid.  Some do not have a lot to negotiate with.

Aug 17, 2009 06:39 AM
Michael Ford
San Diego, CA
California+Hawaii+Oregon

most sellers know that net is net is net.  and i'm with you judy barrett, i often tell other agents that if they want price...that's all they get.  after that they are squarely back into negotiated territory.  if they want costs paid too...no problem, but you gotta pay for that.

part of this seller paid costs phenominon is the fact that most short sale lenders will gladly pay closing costs but will give us a nice tight haircut on commissions (thanks B of A), and also as Riemenschneider states that many buyers have very little cash to work with.  FHA seems like the last man standing.  the costs are mandatory from the buyers side of the desk.

we've been making the deal pay for itself for years in this trade and for the longest time the VA deals were well known for simply adding the loan costs on top of the sales price...it was the price the buyer paid to use that program, only the recent appraisal torture has made the closing costs issue one that requires a very sharp pencil for the rest of the world.

for those agents where the Value Range Marketing was or is used this concept is well known.  while the VRM is annoying as practiced by the Prudential crew,  the concept is solid...let's see what works for everyone and see if there's a deal here that all can live with.  as i think about it, this may be the funnest part of this business, the horse-trading that leads to  the deal.

Aug 17, 2009 12:59 PM
Ginger Moore
Wilkinson & Associates Realty - Gastonia, NC

Congrats on feature post! nice graphics also.  thanks for sharing!

Aug 17, 2009 02:30 PM
Anonymous
Anonymous

So much goes into determining what the best deal truly is for the client.  From purely a buyer's perspective (my only clients at this time in my career) - and especially a first-time homebuyer's - I get them to think about fiscal balance and the significance of cash preservation if they're just starting out.  In addition to seller-paid closing costs, there are loan programs out there that will help offset cash to close, in exchange for a modest hike in interest rate.  It's important to give your client educated options and let them make the final decision.

Aug 18, 2009 12:21 AM
#25
Jenny Durling
L.A. Property Solutions - Los Angeles, CA
For Los Angeles real estate help 213-215-4758

Our local market is highly competitive with multiple offers on just about EVERYTHING right now- even $ million properties when they're priced under market. The ONLY time I would recommend a client ask for closing costs is when they absolutely don't have the cash and need the seller to pay them in order to make the deal work.

Aug 18, 2009 04:52 PM
John Juarez
The Medford Real Estate Team - Fremont, CA
ePRO, SRES, GRI, PMN

The net to the seller is the most important thing, isn't it? In our area, we are seeing many listings sell at full price or more with multiple offers. It makes sense to write an offer that is clear, easy to understand, devoid of complications and as free of contingencies as possible if you expect your buyer to triumph in the attempt to buy the house of their choice. Given that, an offer that specifies an easily identifiable net to the seller with the buyer paying closing costs with a specified amount credited by the seller looks like a good way to go.

Aug 18, 2009 06:35 PM
E. W. Lester
Mort Genius Brands - Fayetteville, GA

Gene, Comment #21 - Agreed. 1st time buyers often need CC paid. Today's rate schedule has points ranging from 3 to -2. Does the buyer really need the rate bought down with the 3 points? You might need to raise the question if building in 6% CC into the Purchase Price is going to risk an appraisal problem. If not, why not, other than that's a thinly qualified buyer (needs lowest available rate to qualify) - a rate jump could kill the deal - lock in that rate!

Erica, Comment #22 - Totally correct. But I don't know how you avoid, at listing time, involving the seller in how he gets to his net. After that you have trust going for you.

Michael, Comment #23 - Value Range Marketing sounds like the ticket, if it's what it sounds like. Thanks for adding that thought.

Ginger, Comment #24 - Thanks! Wish I could just churn ‘em out like some.

? - Comment #25 -"In addition to seller-paid closing costs, there are loan programs out there that will help offset cash to close, in exchange for a modest hike in interest rate."

I think you must be referring to "above par pricing" where the lender pays some or all of the closing costs? Yes, but that's where technical analysis comes in...to determine if higher rate/lower costs is the best way to go. At least, an "educated option" to me would be one that included some ranking from best to worst.

Jenny - Comment #26 - Throw me in that briar patch! (a Southern saying meaning "give me that kind of problem") In ANY market, Buyers or Sellers, your "The ONLY time..." statement should be the guide. Thanks for the insight.

John - Comment #27 - Blow some of that sellers market east please! Until they changed the rules not long ago, FHA lending guidelines made it unnecessary to involve the seller. The required down payment was calculated from the Total Acquisition Cost of the property including loan closing costs (with limits); so, effectively, closing costs could be financed without involving the seller. If that were still the case, buyers who must, otherwise, ask the seller to pay closing costs would not be at a disadvantage in a strong seller's market (i.e.; the disadvantage: buyer is exposed as weak on cash when asking seller to pay).

Aug 19, 2009 01:41 AM
Lyn Sims
Schaumburg, IL
Real Estate Broker Retired

Lately it seems that the buyers rule of thumb is to ask for 3 points no matter if they really need the 'thumb' to close.  It's getting ridiculous, 99% of buyers asking the same thing?  Maybe I didn't read that newspaper article that all the buyers must have read.

Aug 20, 2009 11:37 AM
Joseph "Cathan" Potter
Coldwell Banker - Sebastopol, CA

Thanks, EW.  This is a great analysis, and is a great help in finding the best financial answer for each client.  This report was generated using your company's software, correct?

Aug 22, 2009 05:43 AM
E. W. Lester
Mort Genius Brands - Fayetteville, GA

Lyn - I think it's unfortunate that buyers agents and loan originators just automatically recommend the lowest rate/highest cost on the rate schedule. Especially, first-time homebuyers are the least stable or the most upwardly mobile; so they may not own their first home very long. When the price, therefore the mortgage amount, gets loaded up with these large upfront costs, the loan payoff is much higher in the early term. So, selling sooner than later may put them upside down.

Joseph - Thanks man. It took me many years to perfect my transaction structuring and counseling tool. But because it must be supported by a sponsoring mortgage lender, and because lenders really don't want you to be able to track their specific rates from day to day, and because the software isn't web based, it hasn't caught on. That's why, as the update to the About Me mentions, I am returning to loan origination. I will just use the tool myself to deliver "extra ordinary" support services to my Realtors, and together we will deliver a better home buying experience.

Aug 22, 2009 06:16 AM
Mike Henderson
Your complete source for buying HUD homes - Littleton, CO
HUD Home Hub - 303-949-5848

Great points in the article.  If both parties understand the parameters a win-win deal can be struck.

Aug 24, 2009 05:59 PM