Negotiation Strategies for Purchasers of Residential Real Property

NEGOTIATION STRATEGIES FOR PURCHASERS OF RESIDENTIAL REAL ESTATE
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In a flat or slow market builders will offer a financial inducement in order to sell their unsold inventory of homes. The same is true of many owners whose homes have been listed for sixty days of more with no takers. when the purchaser puts at least 5% down Fannie Mae and Freddie Mac both allow the seller to contribute 3% of the selling price toward the purchaser's allowable closing costs, not to be confused with their prepaid expenses such as fire insurance taxes and interim interest on the loan. Sellers are not allowed to pay any portion of Private Mortgage Insurance [which is required on those loans that exceed 80% of the selling price of the home] UNLESS it is for the ONE TIME SINGLE PREMIUM that protects the investor, in event of default by the borrower, for the life of the loan. However, for the seller to be allowed to pay for the borrower's PMI the borrower must put at least 10% down.

In actual practice the seller usually agrees to pay 3% of the loan amount rather than the selling price. There are many options open to the purchasers as to how to use the 3%. In the following example we have chosen $150,000 as a typical loan where 10% was paid down, and 9% for a thirty year fixed rate loan has been used for example purposes ONLY. Jack and Jill will be the fictitious buyers/borrowers, and $4,500 the amount of the seller's inducement to purchase.

Scenarios
A. In many cases the $4,500 will pay all of the allowable closing costs, so that Jack and Jill will pay no loan fee, escrow fee, title fee, credit report, underwriting / document fee, etc. [Assume that the loan fee would be 2% which would be included in the sellers contribution Their monthly payment for principle and interest will be $1,206.93 plus $42.50 for PMI. [ The charge for PMI is the Standard Annual which is applicable in most states except South Carolina. ] If Jack and Jill chose to do so and had the available funds they could apply what they would have paid in closing costs as a prepayment on their mortgage and knock some FOUR YEARS off their loan.

B. The selling price of $166,666.67 could be reduced by $4,500 which would reduce the selling price to $162,166.67. Ten percent down would make the new loan amount $145,950. At 9% the monthly payment for P & I would be $1,174.35 plus $41.35 for PMI. The borrowers would then pay their normal closing costs of approximately $4,500.

C. If Jack and Jill chose to do so, they could agree to take a loan that would be fixed for seven years with an amortization of 30 years at the same 9% interest rate, but with NO Loan Fee which would avoid a $3,000 charge. They could allocate 2.5% of the total of 3% to be paid by the seller which would pay for the ONE TIME - SINGLE PREMIUM for Private Mortgage Insurance. This would eliminate $42.50 per month, forever. The balance of $750 could then be applied to their normal closing costs which should leave them with out of pocket closing costs of approximately $700.