Q: I hear that sellers are more often chipping in on costs that are typically paid by the buyer (like inspections, closing costs, etc). How can I find out how often that’s happening in our market?
A: You are smart to understand that market dynamics are highly localized — what is standard practice in Missouri might be completely unheard of in Texas. Generally speaking, though, it is the case that in the current buyer’s market (which exists everywhere relative to the market of several years ago), sellers are more likely to contribute to buyer’s transaction costs.
Mindset Management
Knowledge is power, and the home buyers who make the smartest decisions tend to be the ones who are proactive about educating themselves about the process, money matters and the market. Harnessing the power of the Web to prepare yourself for home buying is critical — studies show that e-buyers (that is, buyers who rely on the Internet as an integral resource of home-buying education and information) spend only one-third as much time house-hunting as non-e-buyers.
However, when it comes time to hone in on the standard practices and get clarity on what you can expect in the city or even the neighborhood in which you plan to be house hunting, look to your Realtor for that information. Your agent can look on the MLS at the recent sales in the area and determine how often closing costs are currently being paid by sellers, and probably also has a sense of that just from experience. A Realtor who is active in your market can advise you on the specific standard practices in terms of allocation of costs between buyer and seller, inspection and repair negotiations, mortgage rates and terms, and a host of other critical areas of your transaction that can save — or cost — you thousands of dollars, and your Realtor’s information will be more up-to-the-minute than anything that is published on the Web or in the paper.
So, if you want to know what to expect or, more importantly, what to demand in terms of assistance with costs from the seller, ask your Realtor. If you don’t have one yet, get referrals from your friends and family members who were thrilled with the service they received.
If you are just in planning and saving mode, or you aren’t ready for a conversation with a Realtor about representing you, get online and go to a site like Trulia.com or Zillow.com and use their Q&A forums to get local Realtors’ input on your question.
Need-to-Knows
The reality is that sellers really don’t care whether or not they contribute to your closing costs, or by how much. What they care about is their bottom line — the net sales price your offer represents after all credits for closing costs and repairs are subtracted out. The trick is that in a buyer’s market, many or most of the comparable sales justifying a home’s value may have included closing-cost credits from seller to buyer. That is the information you need to know when determining how much closing-cost credit to ask for, and how that amount should impact your offer/purchase price overall.
Almost everywhere, sellers don’t pay out buyers’ costs on a line-by-line basis. Typically, the purchase contract is drafted so that buyers pay buyers’ standard costs in that market, including inspections, while sellers’ standard costs are allocated to sellers. Then, the contract may include a line item whereby sellers agree to credit a flat percentage of the purchase price back to buyers at close of escrow, which the escrow holder will then apply to cover as much of buyers’ closing and transaction costs as the credit will stretch to pay. Sellers generally do not want to be responsible for paying item by item for things like inspections, lest that payment give rise to an appearance of impropriety or conflict of interest on behalf of the inspectors (by virtue of taking money from the sellers, though their duty is supposed to be to the buyers).
So if you, as a buyer, want to request a credit from the seller that would cover all of your transaction and closing costs, get an estimate of all those costs from your mortgage professional and/or your Realtor, and double-check to ensure that the estimate includes all the inspections, loan origination fees and other predictable costs that you would like covered. And get this estimate prior to making your offer, so the offer can request the correct amount of credit.
With all that said, there are some standard guidelines for closing costs and seller credits. It is very common, nationwide for closing costs to approximate 3 percent of the purchase price of homes under about $700,000 and 2 percent for homes over that amount. Accordingly, these are very common amounts for seller credits. Note that FHA and other government loans can have higher-than-normal appraisal and closing costs, as much as a full percentage point more than a conventional mortgage.
However, there are many variables that can drive closing costs up, including whether the buyer is required to purchase mortgage insurance (almost universal now where less than a 20 percent down payment is being made) and whether the transaction closes at the beginning of the month vs. at the end of the month (near the beginning, prepaid interest for the rest of that month can add nearly a full month’s mortgage payment onto the closing costs).
And just FYI — virtually no lender in America allows the seller to credit the buyer more than 6 percent of the purchase price.
Action Plan
1. Get a referral to a local Realtor and ask him or her all your questions about local standard practices, including closing-cost credits.
2. Go to a real estate 2.0 site like Trulia.com or Zillow.com and ask local Realtors for information on standard practices in your market.
3. Before you make an offer, review your good faith estimate with both your mortgage professional and your Realtor, and make sure you have a good understanding of how much your estimated closing and transaction costs will be before you decide what purchase price to offer and how much credit to request from the seller.
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook," and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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