When real estate was largely regarded as a seller's market some 20 years ago, sellers often could come to the closing table without any cash in hand. That's because the closing costs were paid out of the funds from the sale provided by the bank on the day of closing. But in today's market, which is now heavily tilted in favor of the buyer, more and more sellers are finding they need cash on hand in order to seal the deal. For better or for worse we have entered a new era of sellers closing costs.
Traditional Sellers Closing Costs
What sellers are required to pay as part of closing has not changed. Examples of sellers closing costs include their attorney’s fees, title insurance, tax tags, survey fee, and sometimes a home warranty program. On a $75,000 property the closing costs are typically a few thousand dollars. Most sellers’ bills are able to recover those costs through the proceeds of the sale, making the exchanging of checks merely a formality.
Seller Concessions
Beyond the standard closing costs typically charged to the seller, many homeowners are now finding they are being asked to make major concessions in order to sell their home. One of the big reasons for this is the popularity of the FHA mortgage. In years past FHA rules allowed home buyers to receive substantial gifts through nonprofit organizations that would cover the cost of their down payment. These gifts would originate from family members or friends and then get passed through the nonprofit. That practice has since been outlawed.
In order to compensate for the increased difficulty in securing a down payment, many buyers are now asking sellers to pay for their closing costs. FHA rules allow buyers to receive as much as 6% of the total purchase price of a home in order to pay closing costs. It's now almost a given in today's market that buyers using an FHA product ask sellers for that 6%.
For older homeowners who have paid all or most of their mortgage, 6% is doable, if not annoying. But for sellers who are barely breaking even or might be under water, paying that for 6% is nearly impossible. Again, on a $75,000 home that 6% would amount to $4,500. And that's on top of several thousand dollars they need for their own closing costs.
Increasing the Purchase Price
One of the more creative ways of taking advantage of the FHA rules and making everyone happy is to simply increase the purchase price. So for that same $75,000 home, if the buyer is willing to pay $80,000 a seller could pay the closing costs and still come out fairly close to what he wanted. The seller still will need to be able to write a good check at closing, but that money will be returned to him through the proceeds of the sale.
Increasing the purchase price is good for the seller in that it allows him to recover the funds used in paying the buyers closing costs. However, it may not be good for the buyer to the extent that he will have to look for houses priced slightly lower than his limit. In other words, he needs some wiggle room in order to increase the price if need be. It also means higher mortgage payments throughout the life of the buyer’s mortgage.
The Trend to Continue
According to industry experts the trend of seller concessions is not going to end any time soon. As long as housing prices remain low, credit is tight, and lenders are requiring 5% down on a conventional loan, buyers will be asking sellers to pay closing costs.
The reality of the situation is that the economic downturn has prevented many first time home buyers from saving up enough cash to pay both down payment and closing costs. And for repeat buyers going from one house to the next, all of their cash will be tied up in trying to transact two deals. Either way, buyers in today's market generally don't have the money for closing.
Sellers who are unwilling to bite the bullet may be forced to wait until the market rebounds before selling. This may not be such a bad thing if sellers have a little bit of patience. Real estate markets typically ebb and flow and the housing market in the U.S. is sure to rebound eventually. When it does, there will most likely be a significant lack of properties on the market due to the fact that investors picked up the extra inventory during the down cycle. The lack of inventory will bring prices back up and reduce the need for seller concessions. Until then sellers, be prepared to bring some cash to the table.