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.