Why Seller Paid Closing Costs Really Aren’t

One of the most challenging things to understand the first time you buy a Minneapolis duplex is the term “seller paid closing costs”.

These costs are incurred by the buyer when purchasing a property. They include expenses incurred beyond the sales price of the investment property like appraisal and loan origination fees, as well as prepaid expenses like insurance premiums. In total, they run about three percent of the price of the property.

These costs are typically above and beyond the amount for the down payment on the property and would be paid using whatever funds the buyers have on hand in savings or some other investment vehicle. More importantly, they are due at closing.

When a buyer asks the seller to pay these expenses as part of the purchase price, they are essentially asking to have them included in their loan so they don’t have to pay them out of pocket.  Metaphorically speaking, the sellers pay these costs at closing for the buyer out of the money they get for selling the duplex.

In other words, they take less money home than if the price remained the same and they didn’t pay the buyer’s expenses.

To the buyer, the purchase price is what matters. And to the seller, the amount of money they walk away with is ultimately what matters most. Paying the buyer’s closing costs reduces that amount.

Perhaps the most common way to make both parties happy is to raise the price of the property by an amount equal to some or all of the buyer’s closing costs, which in turn, helps preserves the amount the seller nets on the property. Of course, if the buyer is obtaining a loan to acquire the duplex, the appraiser hired by the bank will have to be able to substantiate that higher value.

So is it a good idea to finance your closing costs rather than paying them at closing? Doesn’t it raise your mortgage payment?

Yes, slightly. There is some relief in this that mortgage interest is deductible.

The real question to ask here is whether your cash can get a better rate of return elsewhere. If the mortgage interest rate is 7.25, but you can make a return of 9 percent by investing the money elsewhere, aren’t you actually losing money by not financing them?

And for some of us, just having the cash readily available in a savings account makes helps us sleep better at night.

But either way, whether out of pocket, or part of the loan, the buyer is, in reality, paying the closing costs.