By Kay Wilson-Bolton
March 30, 2006
A tradition has developed in Ventura County that is contributing dramatically to the rising costs of homes that has nothing to do with predictable appreciation.
It is common in today’s real estate market for buyers to ask for sellers to pay thousands of dollars of buyer’s closing costs.
In some cases, the amount can be as high as $15,000 to $18,000. While this topic may not be a popular one in some segments of the real estate industry, it deserves attention.
It is not unusual for offers to be written at prices which reflect asking price, plus the total amount of closing costs.
Let’s assume that the last sale of a home in a housing tract on Main Street sold for $700,000. The asking price was $685,000, but the seller paid $15,000 in closing costs. Therefore, as the business goes, the next asking price will be at least mirror the $700,000 price, with something added for margin.
In the event that the new price is $715,000, and the buyer pays full price but adds the needed $15,000 in closing costs, we now have a sale price of $730,000.
One would think that appraisers would catch on, and some of them have. However, unless real estate agents note in the Multiple Listings Service closing remarks that closing costs were paid and how much, there is little for appraisers to do but reflect the values as they see them.
Appraisers have a very difficult job in today’s market, particularly as the market adjusts to a softer range of prices. Some lenders have their own appraisers that function with a wider and more liberal range of guidelines.
In a recent case at the beach, one transaction did not require the full amount of closing costs that had been requested. The lender contacted the listing agent and indicated that they were going to figure out a way to “use up the overage” in the form of additional fees otherwise not needed.
My view is that this practice borders on predator lending where people are being asked to pay more than is necessary, and this deserves the attention of the newly created Real Estate Fraud Division in the District Attorney’s office.
There is no doubt that this practice widens the circle of home ownership opportunities and sellers benefit as well as buyers. At some price point, however, this practice will begin to unravel a tool that has made the American dream possible.
For information, closing costs most often paid by buyers include the fees associated with the buyers’ financing; buyer’s title insurance, all or part of homeowners association transfer fees (if there are any); homeowner’s insurance; inspection fees; escrow; and a real estate agents transaction fee if there is one.
When seller’s are asked to pay for closing costs, REALTORS® should ask the buyer’s agent for a copy of the Good Faith Estimate to examine whether or not lenders fees have been inflated because sellers are being asked to pay them.
In reality, buyers are paying the costs through an inflated sales price which is likely to produce negative impacts as the market changes and variable interest rates rise.
Kay Wilson-Bolton is the owner of CENTURY 21 Buena Vista and can be reached at 805.340.5025