Real estate transaction question

[ShiroKuro]

I was giving advice to a colleague who's trying to sell their house, and I want to double check that what I was saying isn't off base.

A repair issue came up on closing and the agent suggested that they offer the buyer closing credits to cover the cost of repairs. My colleague was wondering about the difference between doing that versus lowering the purchase price. (BTW he doesn't want to do the repair himself because that would push the closing date back).

When we bought our house, and knew it needed a new roof, I asked for a price reduction rather than closing credits, because I knew I could pay for the roof out of pocket and I preferred that to getting closing credits, which essentially folds the repair cost into the mortgage.

So first question: that's correct, right?

Second question, as to who benefits from either option... Here's what I said, is it mostly on the mark?

1. Closing credits means the buyer pays the seller for the house, and then the seller gives the buyer a check to cover the repairs. (It's understood that this check is funded out of the house payment). This could benefit the buyer if the buyer doesn't have cash for the repairs, so it gives them that needed cash (without, for example, having to take out a home equity loan or something)
   So the buyer benefits in terms of getting cash for repairs.
   The agents also benefit because the cost of repairs doesn't lower their commission.
   The seller has to "eat" the cost of the repairs, but it comes out of the purchase price, so in that sense, it's not that different from lowering the purchase price, but the reduction doesn't lower any taxes or commission, so this option doesn't really benefit the seller very much.

2. Lowering the purchase price means the buyer pays less for the house, which is good (lower mortgage, less interest over time) but then the buyer does have to pay the repair costs on their own.
   The seller gets less for the house, but also pays less that much in taxes (whatever the percentage is) and less in commission to the agents. So the seller still eats the cost of repairs, but there's a slight benefit in that they are paying that much less in taxes and commission.
   The agents don't benefit in this deal because it directly lowers their commission.

So, is there anything missing in the above description?

As to my advice... It seems to me that there's not really a right answer (i.e., which is the better course of action) because it really depends on the buyer's situation. Ultimately, of course, the "right" course of action is the one that allows the sale to go through.

(edited)

[wtg]

This seems like a pretty good summary:

https://www.homelight.com/blog/closing-cost-credit-vs-price-reduction/

Real estate taxes work strangely here, so I can't comment on your observations in 2, Lowering the Purchase Price. The purchase price wouldn't affect how much the seller would have to put up for pay for the real estate taxes they owe for the time they've lived in the house during the current tax year.

[ShiroKuro]

@wtg said in Real estate transaction question:

Real estate taxes

Ahh, right, this is probably state-specific, but I think it's not actually real estate taxes, but rather, aren't there various fees/closing costs that are percentages of the selling price? Maybe that's where the lowered purchase price benefits the seller more than the closing credits option...

[ShiroKuro]

@wtg from that article:

A credit at closing gives buyers immediate savings on escrow and lender fees, whereas a price reduction must be realized over the course of what’s usually a 15- or 30-year loan.

Right, that's sort of like the reverse of what I was saying... The closing credits give the buyer cash up front, but "price reduction must be realized over the life of the loan" isn't bad if you're thinking about the fact that lowering the purchase price means less interest over the life of the loan.... So again, that depends on the buyer's ability to cover the repairs

“If all things are equal on the offers, it’s generally in the best interest of the seller to accept an offer with a lower price than it is to accept an offer with a higher price and a closing costs credit,” says top-selling Antioch, California listing agent Rick Fuller. “Oftentimes a price reduction offer will save the seller money in the end.”

Yep, this makes sense..

Other than that, the article was helpful (thank you!) but it isn't written from the standpoint of this as a concession in light of repairs.

Anyway, I'll share that link with my colleague. thanks!

[wtg]

@ShiroKuro said in Real estate transaction question:

@wtg said in Real estate transaction question:

Real estate taxes

Ahh, right, this is probably state-specific, but I think it's not actually real estate taxes, but rather, aren't there various fees/closing costs that are percentages of the selling price? Maybe that's where the lowered purchase price benefits the seller more than the closing credits option...

Ah, yes. Hadn't considered other fees and taxes besides real estate taxes, things like transfer taxes and title insurance that are based on purchase price.

[ShiroKuro]

@wtg said in Real estate transaction question:

Hadn't considered other fees and taxes besides real estate taxes, things like transfer taxes and title insurance that are based on purchase price.

Right, so I could just edit what I wrote above and replace real estate taxes with "closing fees and misc. expenses" and it would be more accurate. (I forgot about the real estate tax time lag too)

But the tricky part is, whether that really matters very much depends on just how big the concession is. (He doesn't know yet, waiting for a contractor to come out). But if it's only $5000-10,000, it might not be that big of a deal to the seller whether it's a price reduction or closing credit, whereas having that cash for repairs could be a big deal to the buyer...

I think he was worried that the agent is advocating for the closing credit because that's in the agent's best interest, and he doesn't want to be taken advantage of.... But although I get that and I'm sure it's a factor (and natural for the agent to advocate in ways that don't disrupt their bottom line), but I think it all comes down to the buyer's needs. So I don't think he should automatically assume the agent is trying to take advantage of him.

[wtg]

@ShiroKuro said in Real estate transaction question:

So I don't think he should automatically assume the agent is trying to take advantage of him.

I'm a cynic, so I would assume that.

[ShiroKuro]

@wtg I totally get that! And really, it's just smart to sort of have that as the starting point.

But I was kind of trying to talk him down from the ledge because he was sort of panicking about not being taken advantage of, when what really matters is to get the house sold. So even if the agent is trying make sure they get their commission, they are also trying to make sure the transaction goes through. And that's ok.

Also the part about the buyer, whether they need the cash for the repair, I think is helpful for him to remember....

[wtg]

Certainly no need to panic. But I think it's wise to remember that this is a business deal for all the parties involved. Each one of them (buyer, seller, buyer's agent, seller's agent) will be looking out for their own interests. And he needs to keep in mind that not everyone in the deal is necessarily a) competent and/or b) ethical.

I may be jaded because of my experience helping my friend sell her condo. The agents were unethical and a stumbling block and almost killed the deal. Based on information that I provided, she decided to approach the buyers directly and bypass the agents. She also filed a complaint with the brokerage. Nasty things can and do happen. Her agents' actions ended up costing her a pretty penny in the sale price.

Knowledge is power. He just needs to understand the whole picture, from all perspectives (with primary emphasis on his and the buyer's positions), work the numbers, and decide how he would like to proceed.

Also the part about the buyer, whether they need the cash for the repair

I don't quite understand this. edit: I mean it's ok to be aware of it, but he is not their financial manager. He needs to do what's best for him after looking at the whole picture. That may take into account their preferences, but if it costs him more money than he wants to concede, then that's ok.

Knowledge is power. So is pushing your own numbers.

[ShiroKuro]

@wtg said in Real estate transaction question:

But I think it's wise to remember that this is a business deal for all the parties involved.

I know that was hard for me! It doesn't feel like just business!

Each one of them (buyer, seller, buyer's agent, seller's agent) will be looking out for their own interests.

Yep, and this is so hard, because I think people want to trust each other, and it's easy to develop what feels like a friendship with one's agent. But it's important to always keep a healthy skepticism.

Your friend is lucky to have had your help!

@wtg said in Real estate transaction question:

Also the part about the buyer, whether they need the cash for the repair

I don't quite understand this. edit: I mean it's ok to be aware of it, but he is not their financial manager.

No, but what I meant was that, it's not necessarily only the agents who stand to benefit from the closing credit option, so he doesn't have to interpret his agent's suggestion of that as absolute evidence that he's going to be taken advantage of. The closing credit option could be just what the buyer needs/wants and could make it possible to close the deal.

But yes, all the details matter and he should absolutely be paying attention to the small print! (And not just taking his agent's word for each detail)