Help me understand something regarding home-buying, please...

[Relic]

Let me preface this by saying that I'm a fairly smart guy, but every now and then something is thrown my way that I'm convinced is simple and I should fully comprehend it, but somehow I just can't get my mind around it. I'm hoping that someone here who understands this sort of thing can explain it to me in a way that an 11 year can understand because my attorney's explanation just left me scratching my head.

Here's the situation, we're in the process of trying to purchase a home, and in NJ we have a step called "Attorney Review" where the buyers and sellers both hire attorneys to look over the offer that has been made and accepted and make sure both parties are protected and basically not doing anything stupid.
In purchasing this home, our concern is the closing costs involved as they can certainly spiral out of control. To keep us safe from that, we included in our offer to the sellers, a "seller's concession" of a certain set amount to help cover, if not completely cover all of our closing costs. This is obviously where the sellers of the house agree to give you money to help cover the closing costs.
Well, our attorney just tried to explain to me that we are possibly asking for too high a sellers concession, and if it is more than what our closing costs will actually be, it will put us at a disadvantage because we will then in essence be paying that much more for the house? Basically, the dollar value over what the closing costs will be that we are given will then be effectively added to what we are actually paying for the house. Huh!?? I'm just not following...
Does anyone here understand this?? I'm just sitting here puzzled at the moment.

[DudeistMonk]

Originally Posted by Relic

Let me preface this by saying that I'm a fairly smart guy, but every now and then something is thrown my way that I'm convinced is simple and I should fully comprehend it, but somehow I just can't get my mind around it. I'm hoping that someone here who understands this sort of thing can explain it to me in a way that an 11 year can understand because my attorney's explanation just left me scratching my head.

Here's the situation, we're in the process of trying to purchase a home, and in NJ we have a step called "Attorney Review" where the buyers and sellers both hire attorneys to look over the offer that has been made and accepted and make sure both parties are protected and basically not doing anything stupid.
In purchasing this home, our concern is the closing costs involved as they can certainly spiral out of control. To keep us safe from that, we included in our offer to the sellers, a "seller's concession" of a certain set amount to help cover, if not completely cover all of our closing costs. This is obviously where the sellers of the house agree to give you money to help cover the closing costs.
Well, our attorney just tried to explain to me that we are possibly asking for too high a sellers concession, and if it is more than what our closing costs will actually be, it will put us at a disadvantage because we will then in essence be paying that much more for the house? Basically, the dollar value over what the closing costs will be that we are given will then be effectively added to what we are actually paying for the house. Huh!?? I'm just not following...
Does anyone here understand this?? I'm just sitting here puzzled at the moment.

I'm not experienced in these matters but it sounds like...

You want this concession so your sellers have worked it into the price of the house...you lawyer is saying they jacked up the price more than enough to cover the closing costs and when the closing costs hit they will pay them, but you've already paid for the closing costs and more in the price of the house.

So if closing costs = 10k and to cover your sellers concession they jacked up the price of the house 20k then when they pay your concession your getting shafted 10k.

[jive1]

That's pretty confusing. I'd ask your lawyer, but he seems to be the cause of confusion.

Maybe you can put a clause in the contract saying, "seller will cover all closing costs above xxx".

I dunno, I'd ask another real estate attorney, real estate agent over doofuses like myself.

[jive1]

Originally Posted by DudeistMonk

I'm not experienced in these matters but it sounds like...

You want this concession so your sellers have worked it into the price of the house...you lawyer is saying they jacked up the price more than enough to cover the closing costs and when the closing costs hit they will pay them, but you've already paid for the closing costs and more in the price of the house.

So if closing costs = 10k and to cover your sellers concession they jacked up the price of the house 20k then when they pay your concession you getting shafted 10k.

Closing costs are never a part of the price. That's why so many real estate agents rather have a seller give credits, or cover closing costs instead of reducing price because it means less commission for them.

The price is a part of the contract, and that part is non-negotiable without an amended contract.

[DudeistMonk]

Originally Posted by jive1

Closing costs are never a part of the price. That's why so many real estate agents rather have a seller give credits, or cover closing costs instead of reducing price because it means less commission for them.

The price is a part of the contract, and that part is non-negotiable without an amended contract.

Okay so let me get this straight... Relic comes in with an offer lets say 250k - 10k to cover closing costs, making the actual price 240k. The sellers agree. Lawyers are reviewing, your layer says, "whoa Relic why do you need 10k for closing costs, you should have asked for 5k and offered him 245k which would have made the total price 235k. I'm assuming this concession only covers closing costs and isn't just cash right? So when the costs only turn out to be 5k the other 5k vanishes back into the sellers pocket...5k that you could have deducted from your offer. Right? Wrong? Now I want to understand too.

[Hoover]

Originally Posted by Relic

Does anyone here understand this??

Regardless of what anyone posts in this thread -- and I sincerely do not mean to disparage those who already have and those who will try to help -- but no matter what anyone says, that question can only truly be answered "No".

[jive1]

Originally Posted by DudeistMonk

Okay that money is coming from somewhere though...McDonalds may only charge $1 for a cheeseburger and that seems like a steal but you're paying them $2.00 for a cup of coke that costs them $0.10.

If your buying house from me and you say "I want you to cover my closing costs." I say "okay" and then I add the closing costs to my asking price, if I over estimate your closing costs when I do this then I'm making more money off of you. What am I missing here?

You can't add closing costs to your asking price after the contract is ratified. You'd have to amend it or do a new contract.

- The closing costs don't go to the seller. They go to a 3rd party.
- The price is settled when the contract is ratified.
- Some of the closing costs are based on the selling price (advance interest, escrow,origination fees).
- You won't fully know your exact closing costs until closing, until then you get a Good Faith Estimate which is close.

It's like if I agreed to sell you bass for $10 and $1 for shipping. As part of the deal, I agreed to pay the $1 for shipping. Then when I go to UPS, I find out shipping is for $2. I can ask you to pay the extra $1, or I can absorb the $1, or we can cancel the deal. But you're not required to pay the extra dollar if we agreed that I'd cover shipping, and it wouldn't be fair or legal for me to increase the price to $11 after we made a deal.

[DudeistMonk]

Originally Posted by jive1

You can't add closing costs to your asking price after the contract is ratified. You'd have to amend it or do a new contract.

- The closing costs don't go to the seller. They go to a 3rd party.
- The price is settled when the contract is ratified.
- Some of the closing costs are based on the selling price (advance interest, escrow,origination fees).
- You won't fully know your exact closing costs until closing, until then you get a Good Faith Estimate which is close.

It's like if I agreed to sell you bass for $10 and $1 for shipping. As part of the deal, I agreed to pay the $1 for shipping. Then when I go to UPS, I find out shipping is for $2. I can ask you to pay the extra $1, or I can absorb the $1, or we can cancel the deal. But you're not required to pay the extra dollar if we agreed that I'd cover shipping, and it wouldn't be fair or legal for me to increase the price to $11 after we made a deal.

Yeah exactly, the closing costs are paid to 3rd party so when only 5k is needed the seller pays the 5k. If you worked into your contract up to a 10k concession then that 5k of headroom should have gone into chopping down the asking price.

I get that it can't be changed without a revision to the contract but is that what Relics lawyer is calling for?

[Relic]

Actually I think that you're both onto something. But I think that Dudeists train of thought is where I was kind of headed as well.

OK, let's use Dudeists example. Let's say I'm offering 250,000 for the house, with a 10,000 sellers concession. In essence this is tantamount to me actually asking to pay 240,000 because that's what the sellers will get out of this deal.
Now, from what I understand, a sellers concession has to be ONLY used for closing fees and you cannot pocket the extra cash. IE - 5k if the total only comes out to only 5k for closing. So I ask for 10k, and end up needing 5k, that other 5k goes back to the sellers so I'm now in essence paying 245,000 for the house?
Wait...still trying to work this out..

[jive1]

Originally Posted by DudeistMonk

Yeah exactly, the closing costs are paid to 3rd party so when only 5k is needed the seller pays the 5k. If you worked into your contract up to a 10k concession then that 5k of headroom should have gone into chopping down the asking price.

I get that it can't be changed without a revision to the contract but is that what Relics lawyer is calling for?

Maybe that's what he's saying, but if that's the case then the lawyer should simply state that. But from the OP, it sounds like the lawyer is saying he should reduce the seller concession.

I dunno, but laws vary from state to state for topics such as escrow, closing costs, etc. so there could be some legal reasons for doing that. OP should really talk to a real estate professsional in his state.

[Relic]

Originally Posted by DudeistMonk

Yeah exactly, the closing costs are paid to 3rd party so when only 5k is needed the seller pays the 5k. If you worked into your contract up to a 10k concession then that 5k of headroom should have gone into chopping down the asking price.

I get that it can't be changed without a revision to the contract but is that what Relics lawyer is calling for?

Well my lawyer is just telling me to consider bring down the sellers concession ala a revision once we get a firmer grasp on what the closing costs will actually be.
Another twist is that some of the closing fees may need to be paid in advance, therefore will not factor in come closing time when we would get the concession. This would in effect cause us to overshoot.


EDIT - I'll definitely get a better explanation from the lawyer. She had just caught me at a bad time and tried to explain this fast which thoroughly confused me.

[UncleFluffy]

Hrm. I was looking at this issue recently when thinking about buying and the way I understood it was that a seller's concession is a way of adding the closing costs to the loan.

For example, imagine you have $40k in the bank, that it's a $250k house with 10% down, and the closing costs are $20k.

Normally, you can't cover this with cash on hand, but if you get the seller to ask for $255k and then give you $5k back toward the closing costs you can - the money you needed is now folded into the loan.

That was my understanding based on what I read. It could, of course, be completely wrong.

[jive1]

Originally Posted by Relic

Actually I think that you're both onto something. But I think that Dudeists train of thought is where I was kind of headed as well.

OK, let's use Dudeists example. Let's say I'm offering 250,000 for the house, with a 10,000 sellers concession. In essence this is tantamount to me actually asking to pay 240,000 because that's what the sellers will get out of this deal.
Now, from what I understand, a sellers concession has to be ONLY used for closing fees and you cannot pocket the extra cash. IE - 5k if the total only comes out to only 5k for closing. So I ask for 10k, and end up needing 5k, that other 5k goes back to the sellers so I'm now in essence paying 245,000 for the house?
Wait...still trying to work this out..

Still doesn't make sense.

You're paying $250K no matter what. That's what your note is for. Seller is getting $250K minus closing costs and what's left on their note.

Seller isn't pocketing anything, because they will be paying the closing costs at closing out of their pocket. You won't pocket anything since you won't be paying closing, and your note is still the same. The only people that look like they are pocketing anything are the 3rd parties.



One question, since things are probably different in NJ. Has the contract already been ratified? In VA, there is no attorney review and contracts are good once signed, so I'm assuming the parameters of the offer have already been accepted by the sellers.

[Relic]

Originally Posted by jive1

Still doesn't make sense.

You're paying $250K no matter what. That's what your note is for. Seller is getting $250K minus closing costs and what's left on their note.

Seller isn't pocketing anything, because they will be paying the closing costs at closing out of their pocket. You won't pocket anything since you won't be paying closing, and your note is still the same. The only people that look like they are pocketing anything are the 3rd parties.



One question, since things are probably different in NJ. Has the contract already been ratified? In VA, there is no attorney review and contracts are good once signed, so I'm assuming the parameters of the offer have already been accepted by the sellers.

I THINK Dudeist was onto something, but I'm still awaiting word from my attorney so this can be clarified.

In NJ, when the deal is in Attorney Review, both parties can walk away from it even though the sellers have already accepted and signed onto the offer. Once everything is in the clear after the review, then the contract is officially signed and ratified.

[DudeistMonk]

Originally Posted by Relic

I THINK Dudeist was onto something, but I'm still awaiting word from my attorney so this can be clarified.

In NJ, when the deal is in Attorney Review, both parties can walk away from it even though the sellers have already accepted and signed onto the offer. Once everything is in the clear after the review, then the contract is officially signed and ratified.

You guys have me all caught up in this...

I just called my Mom who is a legal secretary of 20 some odd years to get some of these answers...

In NJ during the review process either party can walk away no questions asked. Nothing is official yet and the seller is still open to better offers.

Her concern was that if the concession price is too high the seller will go with another offer, and she agreed with me that seller is factoring the concession into the total price of the house.

*disclaimer: of course you should listen your lawyer and not my mom, but this is making me crazy now.

[jive1]

Originally Posted by Relic

I THINK Dudeist was onto something, but I'm still awaiting word from my attorney so this can be clarified.

In NJ, when the deal is in Attorney Review, both parties can walk away from it even though the sellers have already accepted and signed onto the offer. Once everything is in the clear after the review, then the contract is officially signed and ratified.

Gotcha, so there is still wiggle room on the contract then.

Now it's making some more sense to me. Not lots, but some.

[jive1]

Originally Posted by DudeistMonk

In NJ during the review process either party can walk away no questions asked. Nothing is official yet and the seller is still open to better offers.

Ah now, things are even more clear.

In VA, once the contract is signed the house is off the market, but you can have backup contracts in case the closing falls through.

Maybe the lawyer doesn't want the concession to be too high, so as to not jeapordize the deal.

[jive1]

Have you tried posting this in Maki's 2 cents thread?

Maybe the answer is there.

[Eric Perry]

I didn't read the whole thread (I'm at work and *should* be working). I just closed on my house 3 weeks ago. My loan was an FHA loan. I was allowed to incorporate 2.3 (or maybe 3.5? I forget) percent into the loan which would go towards closing costs. That 2.5 (or 3.5) was the max however. That didn't even cover half of it. I had to spit up the other half. The closing costs were WAY more than I would have expected!

[Relic]

Originally Posted by jive1

Maybe the lawyer doesn't want the concession to be too high, so as to not jeapordize the deal.

That would absolutely and completely make a ton of sense and that very well may be it, but that's not really how she explained it to me unless she was going about it all bass-ackwards.