I am often asked by both buyers and sellers who is responsible for closing costs. There is a lot of misconception about this so I thought I would write this post to clear things up.
Firstly, it’s important to understand what closing costs are. Closing costs are any costs associtated with closing a real estate transaction. For the seller, the most significant of these costs would be the real estate commissions that the seller agreed to pay their listing broker. For the buyer, these costs include the lender fees associated with obtaining financing, attorney fees for getting the sale closed and recorded properly as well as pre-paid items (i.e. first year of insurance premiums and prorated taxes and homeowner association dues). For a more detailed explanation of what these closing costs are, you can read my other blog post about the costs themselves by clicking here
Technically speaking, the buyer’s closing costs are just that; the Buyer’s responsibility. However, since many buyers are cash poor at the time when buying their home and need all the cash they can scrape together to pay for their down payment and moving expenses, many buyers wish there were a way to finance those closing costs into their loan instead of having to write a check for all of that at closing in addition to their down payment, etc. There is no direct way to finance these costs. However, there is a very common work-around for that. A buyer can effectively finance their closing costs by paying a little more for the home and having the Seller contribute money to pay for their closing costs as part of the deal and this is done more often than not; especially on lower end transactions (under 200K).
Since this is done so often, many buyers and sellers have come to believe that it is simply customary for these costs to be paid by the Seller and an assumption is often made incorrectly by buyers that the seller will automatically pick up the tab for the closing costs and by sellers that they will definitely have to factor in paying closing costs for the Buyer.
When an offer is made on a home, the seller will evaluate the entire package including purchase price and closing contribution as well as any other concessions and focus on the bottom line net price. So, for example, an offer of $200,000 on a home that also asks for a $5,000 closing cost contribution is acutally going to net the seller (before commissions and other seller fees) only $195,000. Therefore, it would be more favorable for a Seller to accept an offer of $198,000 with no seller concessions / closing cost contribution than it would be to accept on that has a price of $200,000 and asks for a $5,000 contribution from the seller. In actuality, if a Seller agrees to a $200,000 price with a $5,000 closing cost contribution, then they also would have most certainly agreed to an offer of $195,000 that doesn’t have the additional concession request tied to it.
We tend to value homes based on sold comparables. When looking at sold prices of homes, it’s important to also look at how much closing cost contribution the seller made to get a real feel of what the “effective” sale price was. This is important for both Buyer and Seller. Since most transactions do involve an average of 2% of purchase price in closing cost contribution, a Seller who sets their price based on comps should most likely expect to end up having to contribute those closing costs for the buyer as well if the neighbors who sold the comparables also did.
In a nut shell, the closing costs are technically the Buyer’s responsibility; but every Seller should expect that the offers they receive will most likely have a closing cost contribution request by the Buyer and in many cases, the Buyer will really need that to happen as part of the deal in order for them to have the cash necessary to get the deal closed.