Question:
“I just got an offer on my house, but the buyer wants me to pay $10,000 of his closing costs. Why should I pay his costs? And why didn’t he just offer a lower price instead? This seems kind of shady, like they’re trying to defraud their bank. Have you heard of this?”
Answer:
Yes. It’s done all the time. And if you pay the buyer’s costs though escrow, the lender automatically knows about it and it’s not shady or illegal.
On the other hand, if you gave the buyer a check on the side (which happens occasionally), that IS shady and illegal.
But you still want to know why you should you pay the buyer’s costs and why don’t they offer a lower price instead.
Let’s take that in two parts.
First, I tell my clients to look at the NET figure. Selling your home for $510,000 with a $10,000 credit for buyer’s closings costs is a lot like just selling your home for $500,000. And if that helps a buyer buy your home, why would you not do it?
Second, why wouldn’t they just offer a lower price? Sorry, but the answer involves some math. 🙁
Let’s assume your buyer is putting down 10% and buying your home for $500,000. In scenario #1, the buyer pays their costs. In #2, they pay you $10,000 more and YOU pay their costs.
Scenario #1: $500,000 / Buyer pays OWN costs
$50,000 down
$10,000 closing costs
$60,000 cash buyer must bring to escrow
Scenario #2: $510,000 / YOU pay buyer’s costs
$51,000 down
$ -0- closing costs
$51,000 cash buyer must bring to escrow
So in #2, the buyer can bring $9000 less cash to close. Since they’re borrowing 10% of a price that’s $10,000 higher, they’re also borrowing $9,000 more. See how that balances out?
NOTE: You may not want to pay costs with a higher price if you’re worried your home won’t appraise high enough. Raising the price and paying costs do increase your risk of a low appraisal.
