In more than half of the buyer transactions I represented last year, my buyer clients decided to ask the sellers to pay a portion or all of their closing costs.
We’ve talked about Financing Closing Costs before. Some buyers ask sellers to cover these costs for them, as the buyer is trying to maximize their downpayment or conserve the amount of cash they will have left over after the transaction.
Deciding to ask a seller to cover closing costs is a personal decision based on a buyer’s specific cash situation. What we need to realize though is that certain situations lend themselves to a seller covering closing costs, while others do not.
Let’s look at an example, from the seller’s perspective. Suppose a seller just listed their house today at $300,000. Their house shows very well, is in a desirable location, and has attracted a fair amount of interest in just the first day. You, as a buyer, fall in love with this house and decide to put in an offer. You need any seller to cover at least $5,000 in closing costs for you so that you have some cash left in your savings account after the closing. You make a full price offer on the house, but ask for the $5,000 back to go towards your closing costs. From the seller’s perspective, you are really offering them $295,000 for their house. They care about the net amount they’re getting. Another buyer comes along that offers them $298,000 and doesn’t ask for closing cost money. All other things being equal with the offers, the seller will most likely accept the other offer for $298,000.
But you really like that house. What if you were to offer the seller $305,000 for the house and ask for the $5,000 back? The seller may take that, right? In this situation they are netting $300,000 rather than the $298,000 from the other offer. But the seller still may not necessarily accept your offer, even though it is for more money. Your offer is still contingent on the house appraising. If there is some risk that the house may not appraise to $305,000, the seller would be taking an unnecessary risk and therefore should still accept the $298,000 offer.
Well then, when does asking for closing cost money not weaken your offer? Most often when you’re looking at a house that’s been on the market for awhile, and it’s overpriced enough (or has something else “wrong” with it; location, amenities, etc.) that it is unattractive to other buyers. In that situation a buyer will have some advantage over a seller and is more likely to get them to pay a portion or all of their closing costs.
As a buyer, if you’re looking for a seller to cover some or all of your closings costs, realize that this concession on the seller’s behalf will weaken your offer in a competitive situation. It’s not to say that in all cases you won’t be able to get a seller to cover your closing costs if their house shows well and has only been on the market one day (I did actually represent a buyer last year that was able to get closing costs covered in this situation), but realize in a Spring market with many buyers, you may have a weaker position. And if you need to ask for closing costs, try to find some other way to sweeten the offer for the seller; give them the closing date they want, put down a larger first or second deposit, have your inspections done within 7 days rather than 14 days, or get them your mortgage commitment letter in a shorter than normal timeframe.