When a real estate investor is first hit with high closing costs while closing on a house, he/she may start to wonder: Who pays closing costs? Are closing costs the responsibility of the real estate buyer or the real estate seller?
Closing costs, themselves, vary quite a bit from location to location, mortgage lender to mortgage lender, and even mortgage to mortgage. So, naturally, who pays closing costs can also vary when closing on a house.
Even though it varies when buying an investment property, a real estate investor can still have some idea about who pays closing costs.
So, who pays closing costs for real estate transactions?
The Short Answer: Both a real estate buyer and a real estate seller will generally pay their share of closing costs for real estate transactions.
For more details on exactly what real estate buyers and sellers pay for closing costs, keep reading!
Who Pays Closing Costs: Closing Costs for a Buyer
Closing costs for a buyer are usually those related to the mortgage. The closing costs for a buyer can include:
- Loan Origination Fees
- Recording Fees
- Underwriting Fees
- Mortgage Points (Discount Points on Interest Rates)
- Attorney Fees
- Credit Report Fees
- Home Inspection Fees
- Appraisal Fees
- Survey Fees
- Lender’s Title Insurance
- Title Search Fees
- Escrow Deposits
If you’re a beginner real estate investor, some of these closing costs for a buyer may be unclear to you. Don’t fret! Read the guide “Breaking Down Real Estate Fees: What Are the Types of Closing Costs of Investing?” to find out about the types of closing costs mentioned in this post.
Who Pays Closing Costs: Closing Costs for a Seller
The closing costs for a seller may be a shorter list, but sellers still tend to pay a large amount. Closings costs of a seller include:
- Real Estate Agent Commissions (for both agents of the real estate seller and buyer)
- Title Insurance Premiums
- Transfer Taxes
- Recording of Transfer
- Prorated Taxes
- HOA Fees (if applicable)
- Home Warrant Premiums
HOA and prorated tax closing costs for a seller are paid to make up for the gap when the real estate buyer has not yet taken over ownership.
Comparing closing costs for a seller to closing costs for a buyer, a real estate investor might assume that a real estate seller pays much less in closing costs on an investment property. This is usually not the case. For example, the real estate agent commission closing costs for a seller can be as much as 6% of the price of the investment property! That can end up being more than all of the closing costs for a buyer put together.
Related: Real Estate Investors Want to Know: How Much are Closing Costs?
These guidelines are what is generally accepted for who pays closing costs for real estate transactions. However, a real estate investor buying an investment property doesn’t necessarily have to pay all of these closing costs!
Who Pays Closing Costs: What Is Seller Concession?
Seller concession needs to be discussed when talking about who pays closing costs. A seller concession is when a real estate seller agrees to pay some of the closing costs for a buyer. Sounds too good to be true? Well, seller concession is a real thing, and it’s a great way for real estate investors who are buying an investment property to save money when closing on a house.
Seller concession does increase the closing costs for a seller and decreases the return on investment. So, why would a real estate seller agree to pay closing costs for a buyer? To understand this, a real estate investor has to understand the real estate market in which he/she is buying an investment property. Is it a buyer’s market or a seller’s market?
Who Pays Closing Costs in a Buyer’s Market?
For a real estate buyer to have the most leverage when asking for seller concession, the investment property needs to be located in a buyer’s market. A real estate market that is considered a buyer’s market has two characteristics:
- High inventory of investment properties
- Low number of buyers for investment properties
In a buyer’s market, a real estate seller will more likely be willing to take a smaller return on investment and unload the investment property onto a real estate buyer. This means accepting higher closing costs for a seller in a buyer’s market.
In a buyer’s market, seller concession usually amounts to 3% of the price of the investment property for paying the closing costs for a buyer.
Who Pays Closing Costs in a Seller’s Market?
In a seller’s market, the leverage in negotiations for buying an investment property falls into the hands of the real estate seller. The characteristics of a seller’s market are the opposite of those of a buyer’s market:
- Low inventory of investment properties
- High number of buyers for investment properties
In a seller’s market, a real estate seller is likely to get multiple offers on the investment property. He/she no longer has to concede to paying higher closing costs or getting a lower return on investment.
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Related: Is it a Buyer’s Market or Seller’s Market?
The Type of Mortgage Affects Who Pays Closing Costs
While seller concession can be used to the real estate buyer’s advantage, there are limitations depending on the type of mortgage:
FHA Mortgage: Seller concession is limited to 3% of the price of the investment property for real estate transactions.
VA Mortgage: The real estate seller is permitted to pay for all of the closing costs for a buyer.
Conventional Bank Mortgage: Seller concession permissions will differ from mortgage lender to mortgage lender. They can also differ because of the location of the investment property. The general range conventional mortgage lenders allow is 3-6% for seller concession.
Always ask a mortgage lender about limitations on who pays closing costs when first applying for a mortgage. Also be aware that no matter the permissions for seller concession, the real estate seller may not be willing to even pay for closing costs for a buyer. Be sure to keep all of this in mind when planning a budget for real estate investing.
Best Real Estate Investing Tips for Who Pays Closing Costs
A real estate investor can’t always guarantee that closing costs for a buyer will be covered when closing on a house. Despite this, there are certain things a real estate investor can do to raise the chances of getting seller concession during real estate transactions.
- First and foremost, know if you’re in a buyer’s market or a seller’s market. This will affect your chances greatly for getting closing costs for a buyer covered.
- The offer for the investment property should be close to the asking price. Make sure this is true even after the closing costs for a seller are subtracted from the price.
- If the offer comes with a quick closing on a house, the real estate seller may be more inclined to accept.
- Don’t ask for too many repairs on top of getting closing costs for a buyer paid for. This will likely get the offer rejected.
- Don’t be afraid to ask for seller concession! It may save you a lot of money on closing costs in the end.
Related: How to Save Money: Negotiating and Reducing Closing Costs
Knowing all about who pays closing costs and seller concession is one important step to saving money in real estate investing and getting a high return on investment. It can even aid a real estate investor in offering competitive prices for an investment property in a seller’s market. Additionally, it can help a real estate investor plan a budget for real estate investing. Understand who pays closing costs and follow our best real estate investing tips, and you shouldn’t run into any issues when closing on a house.