We recently received a purchase contract with a $600,000 price, and $26,000 in seller-credits.
The issue? The $26,000 seller credit exceeds our $19,000 estimate of closing costs (closing costs are “high” because they include impounds and Oakland transfer taxes). The credit is $7,000 too large.
Understanding Seller Credits & Their Limits
Note: Seller Credits can be used towards any closing costs – recurring or non-recurring. Seller credits cannot be used to pre-pay property taxes or HOA dues.
How to Handle Excess Seller Credits
Solutions: (1) Reduce the price of the house and the seller credit by $7,000; (2) Use the extra $7,000 to buy down the interest rate; (3) reduce the credit by $7,000, leave the price the same, BUT have the seller do $7,000 of improvements prior to close (works well if the seller is a builder).
We always recommend the 1st option. The extra $7,000 cannot go back to the buyer in the form of cash, and it cannot be used to pay down the principal. If the credit is unused, it is simply wasted; a “gift” to the seller.
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