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Ask Adam: Getting Closing Costs Paid For

by ARLnow.com — August 7, 2012 at 2:00 pm 6,111 31 Comments

This periodic sponsored Q&A column is written by Adam Gallegos of Arlington-based real estate firm Arbour Realty. Please submit follow-up questions in the comments section or via email.

Question: My fiance and are planning to purchase a home in Arlington this fall and are wondering if we can expect the sellers to pay all the closing costs?

Let me start with some basics.  When closing on the sale of a home, the buyers and sellers each have their own set of closing costs that they are required to pay for.  In some circumstances, a buyer will negotiate to have the seller subsidize a credit towards the buyer’s side of closing costs.  You may want to check out my recent ARLnow article for tips on calculating your closing costs.

Sellers are primarily concerned about the net value of the contract they are considering rather than whether it includes a closing cost concession or not.  If the value of the contract is $500,000… they make the same amount of money whether you pay $500,000 and cover your own closing costs or if you pay $510,000 and ask for them to subsidize $10,000 of your closing costs.

The question becomes whether asking for a closing costs subsidy is the best strategy for you.

A ramification of asking for a closing cost subsidy is that by artificially inflating your price to $510,000 you are essentially financing 80% of that $10,000 over the life of your loan.  That $10,000 could cost you a whole lot more by the time you sell your home or pay off your loan.  Another consideration is whether it will weaken your offer.  A well advised seller knows that appraisals can be challenging in this market.  Using the above example, the home would have to appraise for $510,000 rather than $500,000 if the seller agrees to subsidize closing costs.

A benefit of asking for a closing cost subsidy is that you can hold on to your $10,000 rather than using it towards closing costs and invest it elsewhere.  With interest rates as low as they are, I can see you making a strong argument for this.

Now that I’ve talked a little about whether it is a good idea or not, let’s talk about whether it is possible.

Below I have provided a list of Arlington zip codes and the corresponding average ‘sold-to-original-list-price’ ratio for the month of June 2012 (according to RBI an MRIS company).  This should provide some insight into exactly how little sellers have needed to concede on their prices.

  • 22205 — 99.22%
  • 22204 — 98.39%
  • 22206 — 98.3%
  • 22201 — 97.38%
  • 22203 — 97.16%
  • 22207 — 97.12%
  • 22101 — 96.61%
  • 22209 — 95.25%
  • 22202 — 95.21%
  • 22213 — 94.53%

If you are considering a reasonably priced, desirable home in the 22205 zip code, the sellers are unlikely to feel compelled to cover your closing costs.  The key to my statement is ‘reasonably priced’ and ‘desirable’.  If the home is lacking in one of these categories then game on.  You are likely the sole bidder.  Ask for closing costs if you want them and by all means ask for a discount on the price as well.

I can think of a situation that exists right now where one of the nicest condos in Clarendon is sitting on the market because it is overpriced.  Though it is a beautiful home in an ideal location, it is likely to be a great target for concessions assuming that the seller can be convinced of his or her folly.

In conclusion, there are still some opportunities in Arlington where you can negotiate having your closing costs subsidized by the seller.  Tools you can use to gauge the situation are the number of days-on-market, seller motivation, desirability of the home, price compared to comparable sales and location.

Another factor that is easily underrated is negotiation strategy.  You need to make a strong, compelling argument for your position and the desirability of you as a buyer without turning the other party off.  Maybe we will have the opportunity to discuss this more in a future article.

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  • Yello

    I am interested in that six million dollar house on the right. If the seller wont pay my closing costs, that I am walking.

  • Tabby_TwoTone

    I had closing costs paid in 2008.

    Craig, would you say that we are *close* to mid-2008 prices in Arlington? I’m in 22204.

    • Tabby_TwoTone

      Oops, I meant Adam.

    • Greg

      I’m not Adam but nearly every place I looked at in North Arlington is at or above mid-2008 levels — that was near the peak of the housing collapse. In fact, most North Arlington prices are back to or near peak prices.

  • Arlington Cat

    Closing costs are usually well over $10,000.00. We had a buyer ask for us to cover all her closing costs when she made an offer. The closing costs were around $16,000.00 If I remember correctly. She also offered about 90% of our asking price. We said “no,” and told her if we wanted to sell the house for what she was offering, we would have listed it at around what she offered. We countered with the asking price plus $5,000.00 in closing costs.

    She agreed.

    In negotiations it is called an “add on,” and every professional negotiator will tell you “add ons” (like the buyer asking for all closing costs to be paid by the seller after a price is offered) are the quickest way to get to a no deal. You can use it as a cherry on top, but you can’t have it be one full scoop of the sundae.

    There, did I help?

    • drax

      So you told her you didn’t like her price offer, and huffed about how, if you wanted her offer, you would have listed at that price…and then you accepted her price.

      • darsasx

        Can you not read or understand the difference between ’90% of the asking price plus $16,000 in closing’ and ‘asking price plus $5000′?

        • drax

          Oops, misread the post. Sorry.

        • Ummm

          So you told her you didn’t like her price offer, and huffed about how, if you wanted her offer, you would have listed at that price…and then gave her $5K to meet it.

  • CW

    I never understood closing costs. Can you imagine if another business operated that way?

    “Welcome to McDonald’s; I’ll take your order.”

    “I’d like a Big Mac and fries.”

    “Ok, that will be $5.50.”

    “Great.”

    “Now, to finish the deal, we’ll need to add $0.10 to cover our utilities, $0.05 to our corporate legal counsel, $.07 for janitorial services, $0.05 for accounting of the transaction…”

    • Ballstonia

      You do realize that closing costs paid by a buyer are not collected by the seller, right?

      • CW

        Right. But lots of business transactions have costs that go to third parties.

        • drax

          Lots of reasons not to include closing costs in a sales price, like taxes, the fact that they aren’t final until settlement….

      • Arlington Cat

        Yes, and your realtor gets commission on the price BEFORE any closing cost deductions. Funny how Adam forgot to mention this tidbit.

    • RUKIDDINGME

      CW: You must either be a renter (nothing against renters) or still living in your parents basement.

      • CW

        Do you care to make a point?

        • HayDiosMio

          and you just made it for him…

        • RUKIDDINGME

          My point is is that your clueless.

    • Greg

      The majority of closing costs are lumped into 3 categories:
      - taxes — this is just how the world works
      - prepaids — covers partial period interest, pretty straightforward
      - title/settlement company fees — they need to get paid

      So, not sure how you can be outraged unless you’re anti-government AND anti-capitalism.

      • CW

        Sorry, my attempt at humor/snark came across wrong. I wasn’t outraged. I was just saying that it was sort of a roundabout way of doing things. While the taxes, etc. that are a function of selling price obviously therefore cannot be rolled into the selling price, I would think that the fees/legal/admin could be just for the sake of simplicity.

  • drax

    “I never understood closing costs.”

    Yep.

  • Chris

    This is a good article, and I feel pretty lucky. I closed on a house in 22205 (Bluemont) in June 2012, and I got a closing cost credit. To be honest, it was not an easy negotiation, but tenacity prevailed (also I was quite fair in my offer, meaning it was nearly full asking price). One last thought: it looks like 22205 is pretty hot right now.

  • J

    Does including closing costs change the basis for calculating future capital gains?

  • http://purple.com/purple.html Captain Pup McPuppo

    adam looks friendly

    • Mary-Austin

      I agree!

      • Tabby_TwoTone

        Are you his squeezee?

        • http://purple.com/purple.html Captain Pup McPuppo

          no, he’s mine *winks, howls*

    • Jeff

      He is…. :)

  • GreaterClarendon

    When we bought our last house, and our recent rental property, we used Redfin and had the rebates applied to our closing costs.

  • PLinARL

    We bought last year in 22207, and the sellers paid 2% of the purchase price towards our closing costs. We offered full list less 2% in closing costs, and ended up negotiating the contract price down after it didn’t appraise, too. So the final price ended up being list price less 2% closing, plus another 1% knocked off due to the appraisal.

  • Brad

    If these first time home buyers can pay closing costs, then maybe they shouldnt buy – or better yet, they can buy in woodbridge

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