In some real estate markets, sellers get plenty of offers at or above their asking price. Other times, though, you may find that you need to offer an extra incentive to prospective buyers. Popular options for attracting more buyers include reducing your selling price and offering a closing cost credit, both of which help the buyer save money on the purchase.
It may seem like a price reduction and a closing cost credit of the same value are virtually the same for the seller. Both strategies reduce your proceeds by the same amount, but they might not have the same results. If you’re trying to sell your home, you should understand how closing cost credits can differ from price reductions and how to tell which option is better for you.
What Is a Closing Cost Credit?
A closing cost credit is a credit offered to the buyer of a home during closing. In some situations, closing cost credits help sellers get more offers or close on the sale more quickly. The credit amount is typically taken from the final sale value of the property, so no one has to pay the sum upfront. Sometimes, the buyer agrees to add the credit to the purchase price of the home, which gives them immediate access to funds they may not otherwise have. Other times, the seller agrees to take the credit out of their proceeds from the sale.
The buyer and seller negotiate the closing cost credit agreement and put their final decision in writing. It’s important that both the buyer and seller be clear about what the funds will be used for. Buyers can use the credit to cover some of their closing costs, including property taxes, mortgage fees, the home appraisal, and other expenses directly involved in the escrow closing.
Closing cost credits can also go toward home repairs if the buyer and seller come to a mutual agreement on the matter. This way, neither the seller nor the buyer will have to pay out-of-pocket to repair the property. Instead, the cost of repairs is calculated into the final offer for the home.
Benefits of Offering a Closing Cost Credit
Closing cost credits are very appealing for buyers. When purchasing a home, you have to come up with a down payment, cover your moving costs, and pay for a number of other miscellaneous expenses. Paying for closing costs in addition to everything else can be a financial burden, so the credit is a major selling point.
If you’re struggling to get offers on your home, offering a credit of $3,000 to $5,000 could completely change the situation. Some buyers may even offer a higher purchase price in exchange for the credit, so your total proceeds won’t change at all.
Although a price reduction and a closing cost credit are mathematically similar, there’s sometimes a psychological difference between the two for buyers. A price reduction might raise red flags as it makes it seem like something is wrong with the home. Prospective buyers may be skeptical about why you couldn’t sell the property at its original price. A closing cost credit, on the other hand, feels like an extra incentive or a bonus to many buyers.
When to Offer a Price Reduction
Closing cost credits are generally preferred among buyers, but they’re not always ideal for sellers. Sometimes, a price reduction is a better option when you’re trying to get more offers on your home.
A price reduction and a closing cost credit of the same value might result in slightly different financial situations during and after the sale of your home. Many of the fees related to selling your home are calculated based on the sale price of the property, so selling at a reduced price will also reduce your fees.
If your proceeds from the sale will be subject to capital gains taxes, a price reduction will lower your tax bill, too. Home sale profits that are less than $250,000 for single filers and less than $500,000 for married couples aren’t subject to capital gains, so most sellers don’t have to worry about this. However, you could save a few hundred to a few thousand dollars by offering a price reduction if you do have to pay capital gains taxes.
Another consideration is whether or not offering a price reduction will push your home into a different bracket in the filters buyers use to find properties online. Most real estate websites allow users to filter by price in increments of $50,000. If, for example, you reduce your asking price from $305,000 to $300,000, your home may now appear in the filtered results for a different set of buyers. This could be a great way to increase your offers if you’re struggling to sell the home.
You should also be wary when the buyer asks for a closing cost credit during negotiations. Often times, buyers try to negotiate for a credit simply to get a better deal on the sale. However, this sometimes indicates that the buyer is financially stretched thin and is struggling to cover the down payment and the closing costs. If you get this impression, you might have trouble when trying to close.
A closing cost credit can be an effective strategy for getting more offers on your home. As a seller, though, offering a price reduction may be a better option. You should consider how each choice could change your fees and taxes as well as the effect it may have on the buyer. If you’re not sure which strategy is better in your situation, consult with your real estate or financial advisor. The option you choose could make a big difference in your selling time and in your proceeds, so it’s important to be thoughtful, careful, and intentional in your decision.
Michael Carr is the Co-Founder & COO of BrandFace, LLC. He is also a real estate branding expert and international bestselling author. As America’s Top Selling Real Estate Auctioneer, he has sold billions of dollars in commercial and residential properties.