Adding a Closing Costs Clause - Thoughts??

Question

In my recent search to buy a new primary residence in an out-of-state market, I wanted to apply what I think to be a great addition to the offer contract. I heard it from Keith Weinhold on his Get Rich Education Podcast and literately stopped what I was doing just to write it down. He said that in every offer he submits, he includes the phrase "The seller will pay allowable buyer's closing costs, prepaids, prorations and all lender allowable expenses." Thanks Keith!

So naturally when I put an offer in on a house in Maryland, I told my real estate agent to include this. She told me it was completely irrelevant - that part of my offer already included that the seller will pay 3% of the closing costs - the maximum allowed amount in that state. And then I talked to the lender I was dealing with at the time (her preferred lender) and told him the same thing and he said that he agrees with the realtor as it's completely unnecessary.

Now, this was not a house I was going to flip, but rather a home that I would be moving in to (and they didn't end up accepting the offer anyway). I have since parted ways with this realtor because we did not see eye to eye on a lot of issues, this being one of them. I want to buy a primary residence that I can house hack and made it very clear I'm trying to purchase the property from an investor mentality and she clearly wanted a young couple to come to town, fall in love with a house right away and get her commission - but that's a story for another time.

Am I out to lunch here? I think it's a great phrase to include, even if it is redundant. However, I am brand new to this and still don't know what I don't know, you know?

Thanks!

Russell Brazil · Answer

Depends on what part of Maryland. Areas close to DC, simply put no listing agent would take your contract because the phrasing does not allow for a definitive amount. Your fees with the lender could be infinite, so then say if you were using an FHA loan, the phrasing would automatically go to the maximum of 6%. Maximum subsidy on other loans is 3% for owner occupants, so as your lender and realtor told you, there simply is no reason to try to add any other phrasing to the contract.The 3% is not state specific, it's Fannie/Freddie underwriting guidelines.Also by going to the maximum, you leave yourself no negotiating power post home inspection as the listing agent knows the subsidy can not be increased.

Malcolm Lawson · Answer

I get the sellers to pay closing cost on the majority of my contracts. What I do is get the lender to give me an estimate of the closing cost and put into the contract "seller will provide closing cost assistance up to $8,200" or whatever the estimate is from the lender. It is important to get specific. You do have to be worried about vague language scaring off sellers. I used to put something like "seller with providing closing cost assistance up to 6% of sales price" just to cover my ass. But the sellers will crunch the number and 6% may end up being like $12,000. So if your closing cost is only going to be $8,200 then there is no need to scare like that.So get specific. Instead of saying seller will pay "allowable buyer's closing costs, prepaids, prorations and all lender allowable expenses". Ask your lender how much those will be and ask for that specific amount in closing cost assistance insteadAs an agent, I probably wouldn't allow my clients to accept an offer that was that vague either. I would ask the buyer to give me a number. Now, of course, we are in a seller's market here in Maryland with about 2 months of inventory. It is very common for homes to be in a multiple offer situation, especially in Annapolis. If we were in a buyers market maybe things would be different.

Ryan Murdock · Answer

@Rob Roy No chance I would accept personally or advise seller clients to accept an offer with the vague "The seller will pay allowable buyer's closing costs, prepaids, prorations and all lender allowable expenses" language included.In a competitive market you may need all the help you can get writing clean and easily digestible offers. Don't clutter them up with unnecessary and undefined conditions.

Christopher Phillips · Answer

@Rob RoyYes. It's redundant.If you already asked for the 3% towards closing costs then Keith's statement is redundant. At the end of the day, the lender and the loan program will dictate the max % and where it's allowed to go. One place it can't go is the down payment. So, that just leaves the stuff in the closing costs. So, asking for 3% towards closing costs and then laying them all out in detail is asking for it twice.

Malcolm Lawson · Answer

I agree with @Beth H. going in with your highest and best offer from the start and then standing firm there is allot better strategy in this market rather than submitting low ball offers hoping to negotiate them down. It will also save your's and everyone else's time.

Beth H. · Answer

I agree with what has been stated above. I do a lot of rehabs in Maryland. This is definitely a sellers market and most if not all of my listings in the last couple years have had multiple offers and rarely with seller subsidy request. So if you really want the property go in with an offer that is your highest and best upfront.

Wayne Brooks · Answer

Lots offers classes, podcasts, "educational videos" have a lot of stuff that sound good to the not well informed, but don't translate well over to the real world.

Melvin List · Answer

@Rob Roy hopefully before you put in the offer you had already spoken with a lenders and had an estimate of all of your buyers closing costs. You should always know your closing costs before putting in a offer so that you know if the 3% covers all of your buyers closing costs.

Michael Cohen · Answer

Russell Brazil is correct. The allowable third party contribution is loan specific, not state mandated. There is no reason to put it in the contract beyond the standard financing addendum as it's a common negotiation tactic. FHA is 6% limit VA is 4% limit USDA is 6% Conventional/Conforming is 3%

Ned Carey · Answer

@Rob Roy you are talking about semantics. It is essentially a difference way of saying the same thing. Your contract should be clear. Avoid things that could make it is different enough to cause misunderstandings.