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

| | Comments (0)

In many transactions these days, the buyer has absolutely no money, or an amount that is not sufficient to pay the costs that they would traditionally be expected to pay in order to close the transaction. Nonetheless, in today's 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 been somewhat tolerant of the practice of late, at least so long as the appraisal comes in at or above the official sale price. However, more of them are once again 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. 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. But 100 percent financing seems almost de rigeur of late.



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.



The Buyers get a deal, or so it appears at first blush. A piece of property without having to save for closing costs. In many cases, they don't have to put a penny down, either. Pretty cool, eh? Get a house and actually skip a month (due to the allowance covering prepaid interest), so effectively putting cash in your pocket. Keep in mind, however, that the average 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, often without coming up with a penny and allowing them to save one month's rent or payment, effectively putting cash in their pocket.



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.



There is nothing wrong with this practice, 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.

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 2005-2017 Dan Melson. All Rights Reserved

 



Buy My Science Fiction Novels!
Dan Melson Author Page

The Man From Empire
Man From Empire Cover

A Guardian From Earth
Guardian From Earth Cover

Empire and Earth
Empire and Earth Cover

Working The Trenches
Working The Trenches Cover

Preparing The Ground
Preparing The Ground Cover

Building the People
Building the People Cover

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

Dan Melson's San Diego Real Estate and Mortgage Website

↑ Grab this Headline Animator

About this Entry

This page contains a single entry by Dan Melson published on September 15, 2007 7:00 AM.

Loan Rate Sheets: An example, and the games lenders play was the previous entry in this blog.

Should Lenders Be Permitted to Sell Real Estate? is the next entry in this blog.

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



What I Do

Read My Promise To All My Clients

My Office Contact Information

There are no better agents in San Diego County!

There are no better loan officers in California!

Ask for your free consultation today!

**********
Favorite Loans Available Now

My Listings

Hot Properties!
Email me! danmelson(at)danmelson(dot)com
**********
I want your business!
Unhappy with your loan?
Can't afford your payments?
I can help!
---
Want to buy smart?
Want to sell smart?
I can do it!
---
Bankruptcy?
Foreclosure?
In Default?
Let Me Help!
---
Want to buy properties in distress?
(defaults, foreclosures and REOs)
Ask Me How!
---
Bad Credit?
No Down Payment?
Ask Me What I Can Do!
---
1031 Exchanges
Forward, Reverse, or Partial
I Get It Done!
---
Should I Buy Now?
Should I Sell Now?
Would It Help Me to Refinance?
I'll tell you if the answer is "No"
I'll help you if the answer is "Yes"
---
Contact me:
My Office

Want San Diego MLS?

Here's my office's link to San Diego MLS

Enter your email address:

Delivered by FeedBurner

Subscribe with Bloglines Add to Technorati Favorites

Not in San Diego?

My other site is here
Powered by Movable Type 4.21-en