But, $320k – $25k ≠$295k
I can’t prove it, but at least when it comes to residential real estate deals, an offer for $300k less $5k in seller-paid points can seem more attractive to Sellers (if not their agents) than a $295k offer with no points subtracted.
The explanation has to do with Seller psychology.
Even though both offers net to the same $295k, the way standard Purchase Agreements are organized, the Seller sees the $300k first; only much later, in the attached Financing Addendum, do they see that the offer is subject to Seller-paid’s.
By the time the Seller gets there, though, they’re already more invested in the deal.
It’s also the case that $300k just seems like more than $295k.
Think of it as the converse of why — minus several zeroes — grocery stores, gas stations, etc. price at $2.99 or $3.99 instead of $3 or $4.
Maximum Seller-Paid Closing Costs
So, if $5k in Seller-paid’s is good, is $20k better?
Unh-unh.
Besides the fact that that far exceeds reasonable Buyer closing costs on a $300k deal, there are two other reasons: 1) depending on the loan product, many lenders set a maximum of 3% in Seller-paid closing costs; and 2) too-high Seller-paid’s increases the risk of the home not appraising.
Especially if valuations are already stretched (as in multiple offers), a home that might have appraised at $295k might easily be rejected at $305k or $315k, scuttling the deal.
Assessing Financing Risk; Loan-to-Value Ratio
Of course, Buyers who max out on Seller-paid points seldom have much money for earnest money or a downpayment, either.
Those are other risk factors in a deal.
In particular, a miniscule downpayment means that the mortgage’s loan to value ratio is high, leaving the lender little margin and heightening the risk of the home not appraising.
See also, “Your Mileage Points May Vary“; and “Why Homes That Sell in Multiple Offers Should Always Appraise.”
