Short Sale Blog

The Importance of Seller Credits in a Short Sale Transaction

Ross Kilburn - Monday, February 22, 2010
I want to share a few thoughts about the importance of the Seller Credit to Closing Costs, and it's surprising impact on short sales. This post is mainly towards listing agents, but if you are a homeowner, all the benefits of our strategies accrue to you.

When I first got started in 2005 submitting my offers on short sale properties, I was taught to always ask for a 3% closing cost credit. Typically, it would be accepted without a thought by the lien holder. If you remember back to 2005, at that point, almost no one was asking for seller credits, as it was a seller's market. So, an extra 3% was a pretty good way to boost profits on an acquisition.

It turns out the Seller Credit has a variety of great uses in a short sale transaction. Here is how we used the seller credit in the last two closings of Seattle Short Sales this month:

Magnolia SFR to McAdams: Purchase price $680,000. The contract was for $680,000 with no closing cost credit requested by the buyer. With the permission of the buyer and seller, we submitted the offer with a 3% seller credit. The first lien holder issued an approval letter, but increased their net by $10,000. Instead of going to the buyer, asking them to increase their offer, or going to the agents, asking them to cut their commissions, we were able to use $10,000 of the seller credit to increase the net to the lender and proceed to closing.

Redmond SFR to Wong: Purchase price $565,000. The contract was for $565,000 with no closing cost credit. We submitted the contract with a 3% seller credit. In this transaction, there were two loans. On behalf of the seller, we pushed the second to release their deficiency. They gave us two approval amounts, one for lien release, and one for full satisfaction. Using the seller credit from the first, we were able to direct funds towards the second for full satisfaction and deficiency release.

In both transactions, all of the agents received full commissions. In addition, we did not charge them a dime for our services. And, money was generated to cover excess lien holder demands and release deficiencies. The seller credit is quite remarkable in its ability to help transactions get done.

One question that comes up a lot is what to do about buyer offers that come in with 3% closing cost requests (or more).

Many offers that we see in the $200,000-300,000 price range are FHA buyers asking for 3-3.5% closing cost credit. The first thing to note is that an FHA, VA or USDA buyer who is putting 0-3.5% down on a property is probably not the best candidate for a short sale property.

We need buyers who are flexible, both on their timing, and their financing, and these buyers in general are not. FHA appraisals can call out repairs that the buyer and seller are unable to complete prior to the closing. Underwriting standards are tightening and a qualified buyer today might not qualify in 2-3 months once the short sale approvals are received.

Sometimes though, even though our goal is to always discount the debt aggressively so that the price point attracts multiple, cash-strong, qualified buyers, we only have one, lonely FHA buyer. What do we do? We make it work!

First off, we don't ask the buyer's agent if the buyer needs their closing costs. They will always say yes, whether the buyer needs it or not. Instead, just cross off the closing costs, and send the offer back. This will test whether they need the credit or not. Many times, they don't have a problem, and we have mutual acceptance.

However, if the agent calls you at this point, and says the buyer 'really needs them,' then we propose a compromise. First, we lower the contract sales price to catch their attention. Then we drop the credit request to 1.5%. For example, on a $200,000 purchase with a $6,000 seller credit request, we counter at $195,000 and $3,000 seller credit.

The buyer, and the buyer's agent have probably never seen a purchase price countered with a $5,000 drop! In exchange, the buyer needs to pay for an additional $3,000 in closing costs. Not a bad trade, huh? $3,000 is a fairly small amount, all things considered, and finding it from their savings or relatives is almost never a problem. If they can't find $3,000 - again, they probably shouldn't be buying a house at this point in their financial evolution.

The bottom line is that our business model works because we use the seller credit to get the deals closed and to get ourselves paid. In general, we avoid having to go back to the agents and parties in the transaction and hit them up for money right before closing. This seller credit model works to get all matter of closing and title issues covered, such as HOA liens, credit card judgments, excess junior lien holder demands, utilities and mechanic's liens.

As a reminder, when you are working on a Seattle Short Sales transaction, use the Addendum included in the Seattle Short Sales DocPac, which covers the usage of the seller credit.

If you are an agent, click here to download the latest version of the Seattle Short Sales DocPac.

If you are a homeowner, click here to get more information and help for your situation.

To your success,

Ross Kilburn
Seattle Short Sales, Inc.
425-444-3833 (direct)
800-603-3525 (office)
888-860-1314 (fax)
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