One of the most important concerns for real estate investors is having cash on hand. After purchasing a home, an investor needs money left over to make repairs to the home. However, since mortgage companies almost universally require a 20% down payment, how can you lower your costs when buying an investment property? The secret is, when making an offer to purchase, to include language to reduce closing costs in a way that benefits both buyer and seller.
Is that how it works. I recently purchased an investment property for $105,000. Knowing it was a buyer’s market with far more sellers than buyers, and I needed cash after closing to make the repairs, I asked the buyer to pay 2% of the non-recurring closing costs.
Use the correct language in your offer
When I made the offer, I included the language “seller will contribute 2% of sales price to buyer’s non-recurring closing cost.” Two percent is the maximum a seller can contribute. This saved me $2,100 in closing costs. Instead of paying $4,527 at closing, I paid only $2,427.
Make it easy for the seller to agree
The good thing for the seller is that it is relatively easy for them to cooperate in this type of arrangement. They don’t have to show up at closing with a check, so it’s not money that comes directly out of pocket. They pay 2% when they receive a slightly smaller check for their house. In this case, they receive a check for $102,900 instead of the sale price of $105,000.
A quick nickel is better than a slow penny for sellers
Was it worth it for the seller to receive less? Wouldn’t it have been better for them to hold on for the full $105,000? No, because it allowed them to sell the house faster than they otherwise would have. If they have a real buyer with money on their hands, is it better for them to wait and see if someone else comes along with a slightly better deal? Not in this buyer’s market. They may be waiting a long time.
Do what I do. The less cash you have to raise for closing costs, the more cash you will have to make repairs and other maintenance costs. Include closing cost share language in your purchase offer to sellers, and you’ve established a true win-win situation.
