Risks involved when sellers pay closing costs

Saturday, January 21, 2017, 2:29PM

By: Keith Gordon

If a buyer requests for a seller to assist with their closing expenses, partially or completely, the seller becomes attached to the appraisal via these buyer costs.  Essentially the contract could say, “the sales price is equal to the appraisal minus the buyer’s costs” to close.  Three to five percent of the sales price generally accounts for these “seller concessions” (as referred to by real estate professionals).  Unfortunately, sellers who agree to help buyers with these costs are fundamentally agreeing to sell their property under appraised value.  There are a few variables involved, including the profundity of a buyer’s wallet, mathematics, and reality.  Usually, buyers who request this sort of assistance are unable to pay for both closing costs and the down payment.  However, neither listing agents nor sellers should necessarily accept that a potential buyer cannot actually afford to close without these concessions.  This can be a negotiating tactic of using the seller to save their own money.  A real estate agent skilled in negotiations should protect their seller by successfully vetting any buyers and their real ability to pay their own closing costs.

 

Deals assisted by a seller basically commit the seller to selling their property at medium or “appraised value” minus the closing costs assistance they agreed to pay for the buyer.  If the contract, or “sales price” is above what the property was appraised for, a buyer that desires this sort of assistance will usually ask the seller to reduce the price to align with the appraisal.  This difference between the appraisal and sales price is called an appraisal shortfall.  Just because the appraisal comes in low, does not mean a seller is obligated to reduce the sales price with what is referred to as a “price addendum”.  It is well within their right to call off a deal in this scenario.  However, by refusing to lower the sales price, the buyer—in all likelihood—will be unable to close and forfeit the deal entirely wasting valuable marketing time.

 

Purchases made by VA buyers are typically financed 100%.  Usually, assistance with closing costs is common with these buyers.  The USDA is akin to the VA in the sense that USDA loans are 100% financing.  FHA loans require a 3.5% minimum down payment.  Buyer closing costs are comprised of insurance, mortgage fees, 6 months worth of pre-paid real estate taxes, points (both yield adjustments and commissions) and any other variety of associated costs a buyer may accrue at closing.


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