Closing costs are assumed to be part of doing business in real estate, but do cash buyers pay closing costs? —-
Closing costs are assumed to be part of doing business in real estate, but do cash buyers pay closing costs?
Yes, you can expect charges for attorney hours, taxes, plus title and recording fees to still apply, though the use of cash can greatly reduce a buyer’s closing costs with the elimination of mortgage fees.
Sellers may also get a break on closing costs when they accept an all-cash offer, though it depends on who the offer comes from and how the deal came together.
Investors paying cash are often willing to help cover a seller’s closing costs knowing that a seller facing financial hardship doesn’t always have the funds to do so.
In addition, many cash sales happen directly between seller and buyer, removing the average 5.8% agent commission fee from the seller’s balance sheet.
Closing costs: Financed vs. cash offer
After several years of renting, saving for a down payment, and dreaming of backyard bliss, an aspiring homeowner decides it’s finally the right time to buy. First, they’ll probably need a mortgage! When you sell a house, this is the type of buyer you’re most likely to encounter, considering 87% of recent buyers financed their purchase.
Buyer closing costs
When buyers purchase a home using a mortgage, they’ll incur costs related to originating and processing that loan. These fees alone are usually 1%-2% of the loan amount but can go as high as 3% on top of attorney fees, title fees, and any additional settlement costs to purchase the home. Overall, buyer closing costs usually amount to 2%-5% of the home’s price.
Seller closing costs
Sellers then have their own set of closing costs to pay, the biggest of which is agent commissions totaling 5.8% on average. These commission charges are usually split between the listing agent and buyer’s agent who facilitated the sale. Sellers also may chip in for transfer taxes, title fees (it’s common in some states for the seller to pay the buyer’s title insurance, while the buyer covers the lender’s title insurance), settlement fees, and incentives like a home warranty.
Cash buyer closing costs example
The closing fees in all-cash real estate transactions are generally much lower. Here’s an example of a settlement statement for a transaction between a local house-buying company in Huntsville, Alabama and a seller in the area (with sensitive details redacted).
Source: (Jordan Fulmer of Momentum Property Solutions)
The seller paid nothing in closing fees in this example, while the buyer paid just under $1,500 in closing costs:
settlement fees of $400
title search fee of $200
document preparation of $225
owner’s title insurance of $566
government recording fee of $28.25
state tax of $14.
And these fees, among others, were eliminated:
loan origination or underwriting
lender’s title insurance
While this example gives you an idea of how cash buyer closing costs can shake out, it doesn’t represent every sale. Yours may be different depending on factors like your home’s value, your market, and the buyer you sell to.
We also know that a low-cost sale can be very appealing to some sellers! If you’re interested in selling to a cash buyer, try HomeLight’s Simple Sale platform. With Simple Sale, HomeLight provides cash offers for homes nationwide in almost any condition. Skip the repairs, staging, showing, and prepwork — and go straight to receiving a full cash offer.
To get started, tell us a few details about your home and we’ll provide you with a cash offer within 48 hours. The program offers no hidden fees or agent commission costs, and the ability to close in as few as 10 days.
Real estate investors (house-flippers)
Some cash buyers, particularly those that rehab distressed properties, often want to make a transaction as easy and pain-free as possible for a seller and therefore may assume the seller’s closing costs as part of the deal.
“Many people who need to sell their house quickly in a cash transaction are not in a position to pay closing costs,” shares DJ Olhausen, owner and acquisition manager of a family-owned house-buying company in San Diego.
Another investor we spoke with — Daniel Sarao who owns an Ohio-based house-buying company — concurs and says he has even paid back taxes that were greater than the house’s selling price just to make the deal work for a seller.
However, the offers that you receive from flippers may be some of the lowest you see. Most flippers will pay 70% of the After Repair Value (ARV), in other words, 70% of the amount which they believe they could sell your home for once they renovate it.
You can’t assume that all cash buyers will pick up your closing costs as a seller. Instant buyers, or iBuyers, offer a similar level of convenience and certainty as house flippers by making all-cash offers for homes. But iBuyers aren’t in the business of flipping teardowns. Many won’t make offers on homes that aren’t up to code. They see their value as providing a great online experience for sellers, and they tend to target homes in good condition.
So, although iBuyers usually make offers at near-market-value, they also deduct closing costs (the same way as a traditional sale) in addition to charging a separate service fee.
An iBuyer cash offer generally shakes out like so:
-Service fee averaging 5%
-Closing costs (title, escrow, and HOA fees)
-Cost of repairs based on an assessment
Individual buyers paying cash
You also may encounter cash buyers on the open market. These are individuals who may have large sale proceeds from a previous home or have otherwise accrued enough money to buy a home outright.
Individual cash buyers may be more willing to split settlement fees and taxes with you since they’re saving on mortgage fees. But similar to the iBuyers, they’re not going to go in expecting to pay a seller’s closing costs.
In these types of sale, sellers are likely to still pay agent commission costs averaging 5.8%, and the offer may not be as high as what you’d receive from a buyer using a mortgage. A recent study from the University of California, San Diego found that mortgaged homebuyers on average pay 11% more than residential all-cash buyers.
Selling for cash: A closing cost workaround?
Closing costs of 6%-10% can really eat into your profits when you sell a home. And if you’re facing any kind of financial hardship or can’t afford to repair your home, shelling out this amount to complete the sale may not be feasible. Now you know that one option to reduce closing costs is to sell to a cash buyer and see if they’re able to take on some or all of these fees. If you’re still in the early stages of making a decision, we’d recommend getting a free online home value estimate, or talking to a top local real estate agent for guidance.
Header Image Source: (Nohe Pereira / Unsplash)
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