Real Estate Matters

What's better for the seller: lowering home's price or offering closing costs?

By Ilyce R. Glink and Samuel J. Tamkin
Saturday, June 19, 2010

Q: We are selling our home in Maryland, and it is listed for $499,900. We're willing to offer $10,000 to the buyer, and we're wondering whether we should offer to pay $10,000 toward closing costs or reduce our price by $10,000. Which benefits us most as sellers?

A: The short answer to your question is whichever method gets the home sold. Both methods have benefits and problems.

In states that require you to pay transfer taxes on the sale of property, a higher sales price will result in additional closing costs. Also, a higher sales price leads to a higher commission for your listing broker.

For example, if you're required to pay 2 percent in taxes on the sale of the home and a 6 percent commission, the higher purchase price will cause you to incur an additional $800 in closing costs.

Some real estate agents, however, will agree to base their commission amount on the net you receive and not charge you a commission on the $10,000 credit. If you can get your real estate agent to agree to do it that way, your costs would be about the same.

If you decide to give the buyer a $10,000 credit toward closing costs, make sure that the credit is clearly spelled out in the purchase-and-sale agreement. You need to make sure the buyer's lender is fully aware of the credit and approves of the credit well in advance of the settlement of the transaction.

If you don't get the credit approved in advance, you might have issues trying to pay the money to the buyer. That's because no money should be transferred between you and the buyer except as stipulated on the closing statement prepared by the title company or escrow closing agent.

The federal income tax consequences for you would be about the same whether you get the higher price or give the buyer a closing-cost credit.

Because of the recession and housing market downturn, some people are eager to have a little extra cash to do work on their homes. If the lender agrees to the closing-cost credit, the buyer will be able to get a slightly higher loan amount and have some cash left over to make repairs to the home or buy new furnishings.

However, the buyer might want the lower price. In some areas, real estate taxes are based on the sales price of the home. If the buyer accepts the closing-cost credit, he or she will start out paying a bit more in real estate taxes from that point forward. For some buyers, paying more in taxes from the purchase forward might be less to their liking than just getting the home for less.

Q: I want to sign my house over to my grandson. Will I have to pay capital gains on my profits when I do this?

A: Why do you want to give your house to your grandson? What financial planning goal are you trying to achieve?

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