Of Apples and Houses
One of the trickier concepts in residential real estate — especially for first-time home buyers — is seller-paid points.
Think of it like this: if you buy an apple from me, is there a difference between paying me 97¢, or paying $1 and getting back 3¢?
Not to me — either way, I end up with 97¢.
And arguably not to you, either; your net cost is 97¢ regardless.
“$1 less 3¢ Rebate”
To make the foregoing apply to residential real estate, now just make two changes: 1) instead of pocketing the 3¢ rebate, apply that amount to the Buyer’s closing costs (mortgage origination, appraisal, taxes, etc.); and 2) add five zeroes.
Why is real estate sold that way, especially to first-time Buyers?
Because they can often afford the monthly payments — especially in an environment of dirt-cheap interest rates and rising rents — but have difficulty coming up with the cash for the down payment and . . . yup, closing costs.
Effect on Commission
Is there a difference to the Realtors between 97¢ and “$1 less 3¢”?
The convention is to calculate the commission on the gross sale price, so the sale for $1 yields a higher commission than one for 97¢.
However, the difference — usually 6% to 7% of
3¢ $3,000 — is miniscule on a average sale.
By contrast, it matters (a little) more to the Seller, whose commission expense would be nominally higher when points are included in the sale price.
On a $200,000 home sale with 3% in seller-paid points, the difference comes to $180.