At a real estate closing, both the buyer and the seller have costs associated with their respective sides of the transaction. In recent years the trend has been for buyers to ask sellers to contribute funds to help the former cover most or all of their closing costs and/or prepaid expenses – there is even a separate purchase agreement addendum that addresses this subject, and FHA and Conventional lending guidelines have advertised parameters related to these contributions – that’s how common they are! I have discussed these contributions from a seller’s vantage point in another article, http://johnchrisney.com/?p=526 ; the following demonstrates this same subject from a buyer’s perspective.
As an example, let’s assume a home is listed for sale at $200,000, and, after negotiations, the seller accepts an offer of $194,000. In round numbers, the Sellers will net approximately $180,000 (let’s say they own the home free and clear of mortgages). Next, let’s assume that this same seller had received an offer of $200,000 from a buyer who was also asking the seller to pay 3% toward his or her closing costs. These terms would yield an effective sale price to the seller of $194,000 ($200,000 less 3% ) and the same bottom line as the first example. The seller would normally be indifferent as to which transaction to favor.
But the buyer would normally not share that indifference:
The buyer of the above home would be required to make a minimum down payment of 3%, or $6,000, and there could easily be another $6-8,000 in closing costs and prepaid expenses due at closing. For many first time home buyers, $12-14,000 is out of reach, and if it were not for the financial contribution coming from the seller, these first timers might have to postpone their entry into the housing market – to their detriment! On the other hand, for an additional $28/month (the increment related to a $6,000 larger mortgage) the buyer’s necessary cash requirement is cut in half, entry into the housing market has not been delayed, and the cost, in most buyers’ view would be reasonable and manageable. This is also the value of today’s incredible interest rates, because this argument might be much less persuasive if mortgage rates were at, say, 10%. Let’s hold our breath on that one…