What Brooklyn buyers should know about closing credits (and how to negotiate them)
Oct 26, 2023
Real estate is filled with (some might say riddled with) its own terminology — much of which can be confusing for the first-time buyer. And even if you’ve bought elsewhere, buying in New York City means learning about all kinds of arcane and wacky processes you may never have encountered. One of these is the dance of the closing credits.
Closing credits are simply the money the seller pays the buyer at closing. Simple, right? But also a bit of a head-scratcher. Why would a seller be paying a buyer? It’s actually a pretty interesting citation, and one that affords some savings opportunities for buyers, so let’s get into it and consider the ways you, as a buyer, might be able to negotiate for a sweeter deal.
How closing credits work
For the buyer, it reduces the upfront costs, making homeownership more affordable. For the seller, it keeps the recorded sales price higher, which can be advantageous in specific situations.
Closing credits are a valuable tool in various scenarios, particularly when there’s a disconnect between what the property is valued at by the seller and what the market dictates. Here are some instances where closing credits can be beneficial:
- Developers and Multiple Units: Developers with multiple units to sell often use closing credits to sweeten the deal and attract buyers, particularly in a soft market.
- Co-op Buildings: Co-op buildings may employ closing credits to protect shareholders’ value without impacting the listing price of other units in the building.
- Soft Real Estate Market: In challenging real estate markets, such as the one seen during the pandemic, sellers may offer closing credits to entice buyers. Other concessions might include covering common charges for a period or paying the transfer tax for the buyer.
Negotiating a beneficial deal
Closing credits can be a powerful tool when there’s a disconnect between property value and market conditions. This often occurs when the real estate landscape is changing (such as what we saw happen during the pandemic).
However, it’s essential to note that closing credits won’t be suitable for every buyer, and lenders often limit the amount they will accept to around 3% of the purchase price. The sales contract must clearly outline the terms of the deal to avoid potential issues.
For both buyers and sellers, showing a lower sales price might be in their interest for different reasons, such as reducing transfer taxes.
On the buyer’s side, closing costs can significantly impact a resale deal, especially if there is a tax abatement on the building. Buyers can use closing credits to their advantage to bridge these financial gaps.
While questions might arise about broker commissions and transfer taxes, as long as the contract is transparent, there’s no risk of fraud. It’s crucial to disclose the use of closing credits to the buyer’s lender when necessary.
Closing credits can be a valuable asset for buyers in specific situations, offering a way to reduce upfront costs and secure a better deal. By understanding when and how to negotiate them, you can take advantage of this financial tool and navigate the real estate market more effectively. Just remember to ensure transparency in your contract and consider the potential impact on market perceptions.