Should you ask for a Seller Contribution to Closing Costs? Let's look at both perspectives and see how this will affect you.
7 Questions To Better Understand How Seller Contributions Affect The Home Buyer
Many buyers come to us and say,
"I definitely want the Seller to contribute to my closing costs. My friends/parents said that every Seller makes this contribution and I read about it in some articles and heard it on the news."
Sure, who wouldn't want a Seller to pay for some of their closing costs. But this is not free money. You will pay for it somehow. Let's take a look.
1. How Much Money Can a Seller Contribute?
Ask your mortgage lender how much money a Seller can contribute to the real estate closing costs and in what form.
Different loan types have different restrictions. So before you make an offer, know what you can and cannot ask for. We have heard of buyers ask for a contribution only to have it rejected by the lender at the closing table. That is not fun and definitely a situation that you want to avoid. So have a detailed conversation with your lender, know your options and get educated on how each option will affect you.
2. What Kind of Seller Contributions Will You Ask For?
Are you going to ask for points to buy down your loan amount (points may be tax deductible - ask your tax advisor)? Are you asking for a contribution to generic "closing costs"? Or a contribution to something specific? What is the best option for you?
Evaluate different scenarios with your mortgage lender. Look at different interest rates with different points and how that will affect your monthly payment over the life of the loan. Know the facts. It puts you in a better leverage position.
3. Do You Really Need To Have the Seller Contribute to Your Closing Costs?
Do you really need that contribution? Think about it. In a negotiation, it is better to negotiate on as few items as possible. So have two lists, one list is "must haves/deal breakers" and the second list is a "wish list."
You don't want to clutter your offer with lots of unnecessary requests. If you do, you may be just rejected outright without making any progress. So, if you need the contribution, go for it. But if you don't, think about whether there are other terms more important to you and make sure you go for them instead.
4. Translate the Seller Contribution Percentage To A Dollar Amount
When I represent the Seller, I always translate percentages into dollar amounts. A $200,000 offer price with a 5% seller contribution is equal to a $190,000 offer to the Seller: "Mr. and Mrs. Seller, are you willing to accept $190,000 for this home?" If yes, great. It does not matter how we get there, as long as we get there.
So $200,000 with 5% contribution or $190,000 is the same thing. Or is it....
- By selling the home for $200,000 instead of $190,000, the Seller incurs additional commission, taxes and closing costs on the $10,000 contribution. So the two scenarios are really not exactly the same.
Depending on the strength of the market and who I am representing, buyer or seller, we sometimes negotiate these additional expenses or sometimes we just let them go. I add up the additional costs and discuss them with the sellers so that they can make the best decision for them. I never want them to find out later that they left money on the table.
5. How Does A Seller Contribution Affect the Property Appraisal?
But what about the appraisal? By bumping up the price to offset what the Seller contributes, we often run into appraisal issues.
For example, the appraiser will appraise the home and lend against $190,000 but will not lend against a value of $200,000. If the home does not appraise at the higher price, the price will come down and the parties have a decision to make:
- Delete the seller contribution altogether,
- Negotiate some sort of split,
- Keep the price where it is and have the buyer pay the difference between the sale price and the appraised price, or
- Declare the contract null and void.
7. How Does A Seller Contribution Affect the Buyer?
But what about the Buyer?
At a higher sale price, the buyer is going to finance the contribution and pay for it in the monthly fee, points and closing costs. Nothing is free. So, if you really need the contribution because you are short on cash, go for it and finance it. But if you don't really need it, run the numbers for multiple scenarios and see what really makes sense for you.
Speak With a Knowledgeable Mortgage Lender To Evaluate Your Options!
We know that this is a lot to think about and we highly recommend that you speak with a knowledgeable mortgage lender to help you evaluate all of your options. You will be paying this loan over the next 30 or so years so you really want to do your homework.
We at Yaffe Real Estate have been in business for over 20 years, have worked in all types of markets - seller's markets, buyer's markets, flat markets, rising markets, falling markets - and know how to negotiate the best terms for you.
Give us a call. We are here to help.