The Myth: Sellers "Pay" Buyer's Closing Costs

Sellers never pay the buyer's closing costs... plain and simple! Forever, all parties to a transaction have used the phrase: "Seller paid closing costs"... or something close to this. The truth is that in every situation I can think of where there is a "seller consession", the buyer is actually still paying the closing costs and financing them in with the mortgage. Let me explain why that is....

One needs to view the transaction from the seller's perspective. They have a house to sell and they have a price in their mind that they will not go below. Or, stated differently, if they get this price or above, they will be happy. For this example, let's say that price is $300,000. They could and probably are asking something more than this amount. Selling the home for $300,000 would net this particular seller $75,000 at settlement.

If a buyer comes to the table with an offer of $300,000, the seller is thrilled and accepts. If the buyer comes to the table with an offer of $315,000 and asks for $15,000 from the seller to cover closing costs; again, the seller will be thrilled and accepts. Under either scenerio the net price to the seller is $300,000. And in both cases he nets $75,000 or close to it after adjusting for a little difference in higher costs for commission and transfer taxes on the extra $15,000. (Approx. $1,000). The seller would not accept any offer that has a net price lower than $300,000.

Since the buyer may now have a loan amount $15,000 more ($315,000 vs. $300,000), the buyer is actually financing the closing costs into the mortgage loan. The seller hasn't "paid" the buyer anything.

It always surprises me that buyers don't get this. When I explain their options as we develop our offer strategy, they have trouble understanding it from the seller's side. And the seller's side is very simple - the bottom line or what is the amount they walk away with at settlement. How it's structured between offer price and seller consession doesn't make any difference to the seller - as long as the home will appraise for that offer price.

Finally, when preparing an offer,what we should ask the buyer is: "Are you paying your own closing costs at settlement or do you want to finance them?"