Seller Paid Closing Costs (or, When Your Prospective Buyer Has No Money)

| | Comments (0)

In many transactions when I originally wrote this, the buyer has absolutely no money, or an amount that was not sufficient to pay the costs that they would traditionally be expected to pay in order to close the transaction. Today, unless they're eligible for a VA loan, there is no such thing as a "no down payment" loan, but the trick is to stretch the cash they do have to make the transaction work. In a buyer driven market, often the seller still wants to do business with them.

The usual way it's handled is in Seller Paid Closing Costs. The Seller gives the buyer an allowance to cover their share of the costs

Lenders have become somewhat tolerant of the practice, at least so long as the appraisal comes in at or above the official sale price. Many of them were starting to revert to the treatment this trick traditionally got, which is to say, if the sale price included a rebate to the buyer, then the sale price as far as the lender was concerned was the official price less the rebate. In other words, seller's net. Remember, lenders value real estate the same as accountants, on the LCM principal - Lesser of Cost (which is to say purchase price) or market (which is to say the appraised value). If the seller is giving the buyer money back, then the official price listed on the transaction isn't really the price, is it? Do advertisers tease you with the gross price of stereo or computer gear before the rebate, or the net price after the rebate? Same principle here. The lenders traditionally took this stance, although it has been more relaxed in the highly competitive lender's market of late, and although they were starting to change back, the dearth of qualified buyers with extra cash has made them reconsider that. The lenders are (typically) not going to lend more money than the lesser of those the two variables, cost and market, and they will base the loan parameters on whichever is less. You can always buy a house for more money than the value, as long as you have the cash to make up the difference.

The Sellers get their house sold. That and the ego thing of the official sale price seem to be the benefits to them. I would certainly rather sell for the seller's net in the first place, if I'm a seller, without an allowance, because I have to pay commission on that higher amount. A $10,000 allowance (as has become common here) costs the seller $700 to $800 or so in increased costs - agents commissions, title insurance, escrow fees, transfer taxes - even if the sale price is $10,000 higher because of it. This is neglecting the potential effects of taxes due to exceeding the $250,000 (or $500,000) maximum gain exemption from the IRS code Section 121. I recommend against it for sellers unless there is a substantial deposit, as it is often indicative of a not very qualified buyer. Even then, it's a real good idea to talk to your tax person. Furthermore, with the lenders in full blown panic right now, the only loans being accepted with little or no down are VA and FHA, both of which carry government guarantees. VA can do true 100% financing, but buyers eligible for VA are uncommon. For FHA, the zero down enabling down payment assistance programs are dead, but having 4-6% down for an FHA loan is a lot easier than 10%+ for anything conventional.

The Buyers get a deal, or so it appears at first blush. A piece of property without having to save for closing costs. When I originally wrote this, in many cases they didn't have to put a penny down, either. Pretty cool, eh? Get a house and actually skip a month of writing a check (due to the allowance covering prepaid interest), so effectively putting cash in your pocket. Keep in mind, however, that a competently advised seller is going to inflate the sales price to match, where (if they were smart) they would rather have accepted the net sales price without rebate. Furthermore, at least here in California, property taxes are based upon official original sales price, so you'll be paying for it as long as you own the property. Finally, because your purchase price, and therefore your loan, is going to be higher, your payment is going to be higher, you'll pay higher loan costs every time you refinance, and your eventual net on the property will be lower. If it is the only way to get into the property, and the deal otherwise makes sense, that's fine - but don't kid yourself that you got free money. Chances are that you're going to pay far more than the amount of any allowance because you got it.

If it's bad for the seller, bad for the buyer, and risky for the lender, why does it keep happening so much?

Well, it's a sale for sellers. The property has now been disposed off. It's also an ego defense for sellers. Instead of $470,000, they can tell everyone they got $480,000. So long as they don't mention the allowance, it sounds like a far better price to their friends, family, and soon to be ex-neighbors. In short, bragging rights. Buyers, it gets them into the property, formerly often without coming up with a penny in cash and still allowing them to save one month's rent or payment, effectively putting cash in their pocket. Mind you, that unwillingness is going to be costing money for as long as they own the property, but that's their choice.

Real Estate and Mortgage folks, get bigger commissions. $10,000 in sales price gets translated to $100 per 1 percent of commission. This is anywhere from an extra $100 to an extra $300 or $400 for each of the offices, buyer's, seller's, and loan. Furthermore, I know of loan agents who extract larger commissions because "it's such a hard loan." It does make the loan harder, but not by another point of origination's worth. Wouldn't you like to have extra money for essentially the same work? I assure you that your average real estate agent and loan officer are no different than most folks.

These days, the spoke in the wheel that prevents this from happening is usually the appraisal. With Home Valuation Code of Conduct, most agents in most transactions no longer have the option of steering business to the appraiser who will inflate value as much as possible. I'm not having problems on my purchase money transactions because if appraised value isn't likely to be there, I advise my clients of that fact. But it's putting a real crimp on the transaction mills.

There is nothing wrong with the practice of seller paid closing costs, so long as everybody knows what's going on. But it's certainly not something you want to do if you have a choice.

Caveat Emptor

Original here

Categories

Delicious Bookmark this on Delicious StumbleUpon Toolbar Stumble It!
Please be civil. Avoid profanity - I will delete the vast majority of it, usually by deleting the entire comment. To avoid comment spam, a comments account is required. They are freely available, and you can post comments immediately. Alternatively, you may use your Type Key registration, or sign up for one (They work at most Movable Type sites) All comments made are licensed to the site, but the fact that a comment has been allowed to remain should not be taken as an endorsement from me or the site. There is no point in attempting to foster discussion if only my own viewpoint is to be permitted. If you believe you see something damaging to you or some third party, I will most likely delete it upon request.
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.

Leave a comment

Copyright 2005-2024 Dan Melson All Rights Reserved

Search my sites or the web!
 
Web www.searchlightcrusade.net
www.danmelson.com


The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
What Consumers Need To Know About Mortgages Cover

The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
What Consumers Need To Know About Buying Real Estate Cover

Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read

Links to free samples here

The Man From Empire
Man From Empire Cover
Man From Empire Books2Read link

A Guardian From Earth
Guardian From Earth Cover
Guardian From Earth Books2Read link

Empire and Earth
Empire and Earth Cover
Empire and Earth Books2Read link

Working The Trenches
Working The Trenches Cover
Working the Trenches Books2Read link

Rediscovery 4 novel set
Rediscovery set cover
Rediscovery 4 novel set Books2Read link

Preparing The Ground
Preparing the Ground Cover
Preparing the Ground Books2Read link

Building the People
Building the People Cover
Building the People Books2Read link
Setting The Board

Setting The Board Cover

Setting The Board Books2Read link



Moving The Pieces

Moving The Pieces Cover
Moving The Pieces Books2Read link

The Invention of Motherhood
Invention of Motherhood Cover
Invention of Motherhood Books2Read link



The Price of Power
Price of Power Cover
Price of Power Books2Read link

The End Of Childhood
End Of Childhood cover
The End of Childhood Books2Read link

The Fountains of Aescalon
Fountains of Aescalon Cover
The Fountains of Aescalon Books2Read link



The Monad Trap
Monad Trap Cover
The Monad Trap Books2Read link

The Gates To Faerie
Gates To Faerie cover
The Gates To Faerie Books2Read link

Gifts Of The Mother
Gifts Of The Mother cover
Gifts Of The Mother Books2Read link
**********


C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information

Questions regarding this website:
Contact me!
dm (at) searchlight crusade (dot) net

(Eliminate the spaces and change parentheticals to the symbols, of course)

Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
-----------------
Learn something that will save you money?
Want to motivate me to write more articles?
Just want to say "Thank You"?

Aggregators

Add this site to Technorati Favorites
Blogroll Me!
Subscribe with Bloglines



Powered by FeedBlitz


Most Recent Posts
Subscribe to Searchlight Crusade
http://www.wikio.com

About this Entry

This page contains a single entry by Dan Melson published on November 26, 2020 7:00 AM.

How to Use Internet Based Real Estate and House Hunting Sites was the previous entry in this blog.

Why Buyers and Refinancers Should Think About a 5/1 ARM is the next entry in this blog.

Find recent content on the main index or look in the archives to find all content.

-----------------
Advertisement
-----------------

My Links