When selling a home, agreeing to pay the buyer's closing costs can help you expand the pool of potential buyers and close a deal. However, this concession may involve a significant financial cost. To make an informed decision about whether or not to pay a buyer's closing costs, you need to know what's at stake financially and how to balance this against the need to sell your home.
What's at Stake
Closing cost estimates range anywhere from two to seven percent of the sale price of a home. To pick just one example, if the buyer's costs are five percent of the sales price, your concessions would be $10,000 for a $200,000 home – and that's before you throw in your real estate agent's commission – typically an additional six percent, or $12,000. At the end of the day, paying five percent for closing costs or dropping your price by five percent nets you almost the same proceeds (the real estate commission would be $600 less if you drop the price instead of paying closing costs). If you would not agree to a price concession of that magnitude, then your position on paying the closing costs should be no different.
An important point here is that closing costs can vary a great deal. Both the amounts involved and even the definition of what is included in closing costs can be very different from one situation to the next. Do not make a general, open-ended commitment to pay closing costs, because you might be surprised at how expensive this can get. Instead, make such a commitment only when a specific figure has been calculated, or by stating a maximum amount that you will pay.
Getting specific paying closing costs allows you to treat the decision just as you would a decision about a price concession in the same amount. This is the same place that paying closing costs would leave you financially.
Will Closing Costs Kill Your Home Sale?
Balanced against the expense of paying closing costs is the fact that they can be a great sweetener to get a deal done. Advertising a willingness to pay some or all closing costs helps you attract potential buyers, and an agreement to pay closing costs can be the impetus for a breakthrough at a sticky point in negotiations.
There's no doubt that paying closing costs can help get a deal done, but is it necessary? Here are some things to think about in trying to answer that:
- How long has the house been listed for sale? If you have just recently listed your house, you might want to hold out for a better deal, but as time wears on it means the market is telling you to be more flexible.
- How much traffic are you seeing? Similar to the above, the amount of interested traffic should be a clue to whether or not you need to pay closing costs to sell your home. If traffic is plentiful, you can feel more comfortable playing hardball, but if qualified buyers seem scarce, you'll want to do more to make sure one doesn't get away.
- Have you already bought your next house? If you have, then any delay in selling your home is going to cost you dearly as you double up on mortgage, insurance, and property tax payments. Hastening a sale by agreeing to pay closing costs could save you money in the long run.
- How much did you bend on the sale price? If somebody has already driven a hard bargain, then a request to pay closing costs could be the last straw. However, if someone meets your full asking price, paying closing costs may be within the scope of the financial concession you were willing to make.
- Are the closing costs reasonable? Know what you are agreeing to before you agree to it. If someone is trying to pile a high number of mortgage points and an unusually exhaustive inspection into the closing costs, you may have to draw the line.
- Is there room for a compromise? It may be worth reminding the buyer that you are facing closing costs of your own, the most significant of which is likely to be a real estate agent commission that alone could exceed the buyer's closing costs. In that light, you might convince the buyer that even an agreement to split the buyer's costs is more than fair.
Closing costs are not insignificant, so a commitment to pay them should not be made casually. Make sure that any price offer the buyer makes includes a specification of who will pay closing costs, because you don't want to make a concession on price only to have the buyer coming back looking for another concession on closing costs.