How can a home buyer get the seller to pay closing costs during a real estate transaction? This is a common question among first-time buyers. It’s also the subject of today’s mortgage lesson.
Closing Costs Explained
When you use a mortgage loan to buy a house, you will have to pay certain closing costs on the loan. These include a variety of fees, ranging from document preparation to credit checks. These costs can add up to several thousand dollars, depending on where you live. Average closing costs are around $3,500. In certain scenarios, the seller may agree to pay for some or all of the buyer’s closing costs. This is known as a seller concession. Anytime the homeowner gives (or “concedes”) something to the buyer, it’s called a seller concession.
So, how do you get the seller to pay your closing costs? Do you simply ask them and then hope for the best? There are several things you need to consider, before you make such a request.
Before You Ask the Seller to Pay
The first thing you need to do is consider your real estate market. Are you in a buyer’s market, or a seller’s market? In other words, how much leverage will you have during the transaction? If you’re in a buyer’s market (where inventory is high but demand is low), there’s a good chance you can get the seller to pay your closing costs. Or some of them, anyway. But if you’re in a seller’s market, there’s less chance the seller will make such a concession. They’ll just pass on your offer and wait for the next one.
In addition to the market, you also need to consider the property itself. How much do you want this particular house? Is it priced fairly already? If you’re head over heels in love with the place, and it’s reasonably priced to begin with, you might think twice about asking the seller to pay your closing costs. If you insult them with such a request, the home could slip right through your fingers. It happens all the time.
It’s common for first-time buyers to overestimate their bargaining power. This kind of mindset can result in your offer being shot down. So you need to be realistic. Even in a slow market with motivated sellers, you need to be careful what you ask for.
Let me give you a real-world example, from when I recently sold my own home:
In July 2010, we sold our home in Round Rock, Texas. It was a slow market back then, with few buyers and plenty of inventory. It wasn’t as much of a buyer’s market as, say, California or Florida. But the market still favored the buyer. We realized this, so we worked hard to make our home stand out. We priced it fairly, and we staged the heck out of it. After a couple of weeks, we had three offers for the full asking price. Here’s how they stacked up:
- Offer #1 — Full asking price. The buyers were putting down 20% and had excellent credit (we knew this from the interest rate they received on their loan). They did not ask for any seller concessions.
- Offer #2 — Full asking price. The buyers were using two mortgages to buy the house, an 80-10-10 strategy. Financially speaking, they were a little more “shaky” than the first offer.
- Offer #3 — Full asking price. These buyers were also using a first and second mortgage. They wanted us to pay part of their closing costs.
This is exactly how we ranked these offers. The people who asked us to pay closing costs immediately fell into third place. The financially stable buyers who did not ask for concessions got first place. So we accepted offer #1 and treated the second one as a backup offer. We rejected offer #3. Why? Because the people who asked us to pay their closing costs didn’t understand the value of the home. The other buyers recognized the value we were offering, so they didn’t ask for any concessions. They were smart enough to recognize a good deal when it came along.
This is a prime example of when it’s risky to ask the seller to pay your closing costs. You need to ask yourself the following questions:
- How is the home priced, compared to recent sales in the area?
- Is it a good deal to begin with? How many offers have the sellers received?
- How often are they showing the property?
- What kind of market are you in?
- Would you be devastated if this particular house slipped through your fingers?
When you answer these questions, you’ll know whether or not you should ask for seller concessions. Remember, the seller has the right to turn you down flat — with no explanation whatsoever. So think about that carefully before you ask them to pay your closing costs.
How to Ask for a Seller Concession
So let’s assume you’ve carefully considered the pros and cons, and you’ve decided to ask the seller to pay your closing costs. How do you go about it? This is actually the easiest part. You simply have your real estate agent write it into the contract. Asking for a seller concession is straightforward — deciding to ask is the trickier part.
If you decide to make such a request, your agent will write the seller concession into the purchase agreement. Most buyers who use this strategy will ask the seller to pay 3% of their closing costs. That’s the most common type of request. The seller will review the offer and do one of the three things. They will either accept the offer, reject it, or make a counteroffer.
Conclusion and Summary
If you’re in a classic buyer’s market, there’s a good chance you can get the seller to pay some of your closing costs. If you’re in a classic seller’s market, the reverse is true. And there’s a broad spectrum in between these two poles. Before you ask for a seller concession, you need to consider the value of the home. If it’s already “priced to sell,” asking for closing costs might be a risky move. Some agents will say that you have nothing to lose by asking. But this is false. You have a lot to lose — such as the house you’ve always wanted. So weigh your options carefully.
Brandon Cornett is a veteran real estate market analyst, reporter, and creator of the Home Buying Institute. He has been covering the U.S. real estate market for more than 15 years. About the author