Selling a home doesn’t come cheap.
Industry experts estimate that sellers can expect to pay anywhere from 6% to 10% of their home’s purchase price in closing costs when it’s time to sell. So if your home sells for $450,000, you could spend anywhere between $27,000 to $45,000 in seller fees.
To top it off, buyers sometimes ask sellers to pitch in for their closing costs, too — another 2% to 3% of the sales price. Should you consider it? And if you do, what are the downsides to paying for the buyer’s closing costs as the seller?
To explore the potential drawbacks of paying for buyer closing costs as the seller, we spoke with Tara Limbird, an Arkansas-based agent who heads a team of real estate pros that was nationally ranked at the top one half of 1% of Realtors®. Limbird walked us through when you may want to consider agreeing to a seller concession and discussed the nuances of paying for a buyer’s closing fees.
Buyers and sellers generally pay for their own closing costs — but everything’s negotiable
The buyer and seller generally pay for the costs they each incur during the settlement process. These are examples of what the real estate industry typically considers buyer and seller closing costs:
Typical buyer closing costs
- Loan fees, including the origination fee and discount points
- Lender’s title insurance
- Appraisal fee
- Property inspections
- HOA transfer fee
- Real estate taxes, prorated to the settlement date
Typical seller closing costs
- Real estate agent commissions
- Loan payoff amount
- Transfer taxes and recording fees
- Owner’s title insurance policy premium and fees
- Copies of HOA governing documents, including CC&Rs and bylaws
- HOA dues, prorated to the settlement date
- Real estate taxes, prorated to the settlement date
Some costs, such as the settlement fee (also referred to as the closing fee), aren’t clearly defined as a buyer or seller fee. Instead, your state and local real estate customs dictate whether the buyer or seller is usually on the hook for these closing costs. For example, according to Fidelity National Title Insurance Company, Arkansas sellers customarily pay for the owner’s title insurance policy premium, while the buyer usually pays for the recording fees. The buyer and seller split settlement fees equally.
In California, on the other hand, the party responsible for both the settlement fees and the owner’s title insurance varies depending on the county. In San Francisco County, the buyer pays for both the escrow fee and owner’s title insurance policy. But in Los Angeles County, the buyer and seller split the escrow fee while the seller pays for the owner’s title insurance.
If you’re unsure about which closing fees sellers in your area typically pay, your best bet is to ask either your local real estate agent or settlement agent.
Limbird points out that the local real estate market can shift the dynamic to either the buyer or seller’s benefit when it comes to paying fees. “The seller usually pays their closing costs. The borrower usually pays theirs. However, it kind of depends on the market that you’re in,” she says.
Footing the buyer’s closing cost bill could pay off in some cases
Sellers are more likely to agree to pay for the buyer’s closing fees in a buyer’s market, reveals Limbird. When there are fewer buyers than available homes on the market, motivated sellers may need to be flexible with negotiations to entice a buyer. And that could include agreeing to seller concessions, such as paying for some closing costs.
Agreeing to pay for closing costs could also open up your buyer pool to someone who doesn’t have cash on hand for both a down payment and closing costs. By agreeing to pay for part of the buyer’s closing costs, the seller could snag a buyer who may otherwise be unable to qualify for the home.
In a seller’s market, though, sellers don’t have much incentive to pay for the buyer’s closing costs, Limbird adds. In a competitive market, buyers find themselves competing against other offers, and a buyer asking for a seller concession risks rejection when the seller has others to choose from.
Here are Two Ways You Can Pay for the Buyer’s Closing Costs
When paying buyer fees, sellers typically encounter two strategies: wrap the fees into the overall purchase price or agree to a deduction of your bottom line. Let’s explore each method to understand their differences and how each one could affect your home sale — including potential snags to watch out for.
A) Lower the amount of cash a buyer brings to the table and net the same sale price
With this method, the buyer offers more than what they would otherwise offer a home and requests a credit back from the seller. The result: You pay for the buyer’s closing costs without affecting your bottom line sales price.
Here’s an example of how this tactic works: You list your home for $300,000. A buyer offers you $309,000 with the stipulation that you credit the buyer $9,000 toward closing costs. By wrapping the buyer’s closing fees into the purchase price you net your original asking price of $300,000, and the buyer doesn’t have to bring as much cash to the closing table.
While your net sales price remains the same, there’s a certain level of risk to accepting this type of offer. First, the appraisal may not support the higher sales price. Second, you could end up paying slightly more in closing costs.
Your home may not appraise for the higher value. And the buyer may not qualify to buy your home if it doesn’t appraise at the higher purchase price, says Limbird. That’s because the lender bases its loan amount on the appraised value, not the purchase price. To remedy the issue, the buyer would need to close the gap between the purchase price and the appraised value with additional funds at closing.
However, that solution cancels out the buyer’s advantage of the seller credit. And the buyer may not have a strong enough financial profile to pay for the fees out of pocket.
This puts the seller in a predicament. If the home doesn’t appraise for the higher amount and the buyer doesn’t have access to funds for closing costs, the seller would need to renegotiate with the buyer. If renegotiating isn’t an option, the seller has two options: Either lower the purchase price and pay for the buyer fees (and net less from the sale) or put the home back on the market and attempt to find another buyer.
Some closing fees could increase with a higher purchase price. Certain fees fluctuate based on a home’s purchase price. For example, a 6% agent commission on a $300,000 home increases by $540 if the final sale price jumps to $309,000. If you credit $9,000 back to the buyer, you’re out of pocket for the $540 that you wouldn’t have to pay if the buyer paid for their own closing costs.
Fees that could change based on the purchase price:
- Agent commissions
- Deed transfer taxes, if applicable
- Escrow settlement fees
- Title insurance premiums
Percentage-wise, the change in closing fees may seem relatively minimal. Still, you’ll want to consider changes to your bottom line when considering an offer that wraps the closing costs into the purchase price.
B) Pay the buyer’s closing costs to sweeten the deal
Buyers with leverage to negotiate, such as during a buyer’s market, may negotiate for the seller to pay for the buyer costs outright — without increasing the purchase price. In this situation, the seller nets less in seller proceeds than if the buyer increases the offer price to wrap the closing costs into the sale.
Going back to the first example, you list your home for $300,000. After some time on the market, you’re thrilled to receive a full-price offer. However, the buyer asks for a $9,000 credit toward their closing costs. In this case, you’ll net less than your asking price because the buyer hasn’t increased the purchase price to account for the credit.
The primary drawback in this situation? As the seller, you’ll walk away with less money when the sale closes. By agreeing to the $9,000 credit to the buyer, you’re essentially selling your home for $291,000 instead of $300,000.
Lenders set limits on seller contributions
Lenders limit seller credits, and one reason is that concessions may artificially inflate home values. According to a report by the U.S. Department of Housing and Urban Development, when a seller accepts concessions, negotiations tend to increase the price of the home by at least a fraction of the seller concession. However, the home’s actual value may not reflect the higher sales price, which puts the lender at risk for loaning more than the home is worth.
So while you may be willing to pay for the buyer’s closing costs, lenders have their own requirements. Depending on the buyer’s loan type, sellers are limited in how much they can contribute.
|Loan type||Combined loan-to-value ratio||Maximum seller concession (percentage of purchase price)|
|Conventional||90% and above||3%|
|75.01% to 90%||6%|
|75% or less||9%|
Conventional concession limit: Conventional guidelines set by Fannie Mae and Freddie Mac limit seller contributions based on the buyer’s combined loan-to-value (CLTV) ratio. When a buyer applies for a loan with a CLTV of 90% or above on their personal home or second property, the seller can contribute up to 3% of the purchase or appraised value, whichever is lower. If the seller’s contribution exceeds the limit, the lender reduces the purchase price by the amount above the limitation. Doing so recasts the CLTV, resulting in a reduced loan amount.
FHA concession limit: According to Housing and Urban Development (HUD) guidelines, seller credits can’t exceed 6% of the purchase price or appraised value, whichever value is less. The 6% limitation includes any inducements the seller offers the buyer to purchase. Examples of seller inducements include decorating allowances, repair allowances, and moving costs.
VA concession limit: The Department of Veterans Affairs limits seller concessions to 4% of the property’s value. The 4% limit excludes “normal discount points and payment of the buyer’s closing costs in total concessions.”
What you should consider when negotiating a seller credit with the buyer
When you’re negotiating with a buyer who’s asking you to pay for their closing costs, keep these tips in mind:
Make sure the credit amount is clearly spelled out on your purchase agreement. If you agree to pay for the buyer’s closing costs, agree to either a fixed dollar amount or percentage of the purchase price — not an ambiguous amount such as “buyer’s closing costs.”
Limbird also advises sellers to pay close attention to the contract’s language. She recounts a transaction when the contract verbiage listed the seller credit as 3% of the total closing costs, not 3% of the purchase price. The difference? While a percentage of closing costs may total a few hundred dollars, a percentage of the purchase price equals thousands of dollars. As the sale neared closing, the seller (who happened to be an attorney) insisted on crediting the amount as stipulated on the contract, which was thousands of dollars less than what the buyer had intended.
While the seller benefited in this instance, ensuring clarity in your contract verbiage could save you from unwelcome surprises, such as inadvertently agreeing to a larger credit than you intend.
If you max out your seller credit, you won’t be able to offer additional credits for repairs down the road. After a buyer and seller both sign off on a purchase agreement, Limbird reminds her clients that contract negotiations aren’t quite over. Most purchase agreements include an inspection contingency, or a time period when the buyer has the option to inspect the property for deficiencies.
If issues arise later during the inspection period, such as a malfunctioning water heater, you may agree to credit the buyer for certain repairs. However, if you’ve already agreed to the maximum seller credit toward closing costs, the lender won’t allow an additional repair credit. In order to save the sale, you may need to repair the faulty unit prior to closing.
And above all, never write a check directly to the buyer to get around lender-imposed limitations. “No no no no no, you can’t can’t do that,” emphasizes Limbird. “Lenders consider that fraud to be giving the buyer money outside of closing.”
Don’t forget — you still have to pay for seller closing costs. If you find yourself homing in on buyer closing costs, don’t forget that you’re still on the hook for the seller closing costs. Along with paying the estimated 2 to 3% in buyer fees, adding seller fees of 6 to 10% can make a substantial dent to your bottom line. When negotiating an offer that includes a seller credit, ask your real estate agent for a seller net sheet that details your estimated net proceeds, or the amount of money you’ll walk away with after selling your home.
Are there disadvantages to paying for the buyer’s closing costs? Maybe — but sellers could still benefit
While there may be drawbacks to paying for the buyer’s closing costs — such as risking a low appraisal or netting less for your home sale — agreeing to pay for closing costs can have an upside. If you’re struggling to find a buyer in a down real estate market, offering to pay for closing costs could entice a buyer.
On the other hand, if you receive ten offers for your home, you can probably avoid seller concessions altogether. In a seller’s market, “a lot of sellers have their pick of offers,” says Limbird. And paying for the buyer’s closing costs? “It’s probably not the best option for them.”
Header Image Source: (Chalo Garcia / Unsplash)