Why Price Cuts are Better - The Legend of Hanuman

Why Price Cuts are Better


As a home seller, your goal is to make your listing more enticing to buyers. You find a ton of real estate advice out there about why buyers prefer closing cost credits vs. price reductions when they make an offer.

A credit at closing gives buyers immediate savings on escrow and lender fees, whereas a price reduction must be realized over the course of what’s usually a 15- or 30-year loan.

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Many sources online also claim that it’s all the same to the seller: a $5,000 price reduction and a $5,000 credit result in the same cash inflow for the person selling their home. However, we spoke with top listing agents and determined that what’s nice for the buyer could actually work against the seller:

“If all things are equal on the offers, it’s generally in the best interest of the seller to accept an offer with a lower price than it is to accept an offer with a higher price and a closing costs credit,” says top-selling Antioch, California listing agent Rick Fuller. “Oftentimes a price reduction offer will save the seller money in the end.”

Here, we’ll explore how your sale price affects your closing costs as a seller, how to account for your potential tax liability, and why you should also consider the risk of a low appraisal.

4 reasons a price reduction wins

Let’s start with an example.

Say you list your home for $250,000 and receive two different offers:

Offer A: The buyer will offer you $250,000 with a request for a $5,000 closing cost credit.

Offer B: The buyer will offer you $245,000 without a request for a closing cost credit.

With Offer A, you’re receiving a higher amount of funds from the buyer, but giving up $5,000 in cash at closing through the credit offered. With Offer B, you’re receiving fewer funds at closing from the buyer, but you also won’t need to cut a check at closing for that $5,000 credit. In either case, you receive $245,000 at closing, so what’s the difference to you, right?

While both offers look equal on the surface, there are other reasons why the price reduction wins for the seller:

1. You reduce your selling fees

Many of the fees you’ll pay when you sell your home will be calculated as a percentage of your sale price. That means the lower the sale price, the less (generally) you’ll pay in fees.

Take a look at your agent’s commission. Historically, agent commissions ranged from 5% to 6% of a home’s sale price, split between the buyer and listing agents, with the seller typically covering the cost. However, following the National Association of Realtors (NAR) landmark settlement, the commission structure has changed.

Agent fees are now decoupled, meaning sellers are no longer required to pay the buyer’s agent’s commission. Instead, buyers must negotiate fees directly with their agents. As a result, sellers are only responsible for their own agent’s commission, which is typically around 3% of the home’s sale price.

When we take into account the listing agent’s fee and Offer A with a $250,000 purchase price, the commission owed would average $7,500. If you accept the second offer, the commission owed would average $7,350. That’s a savings of $150.

Remember that other fees, including escrow fees, title fees, and transfer taxes, may be calculated as a percentage of the sale. Many transfer tax fees will rise with each additional $500-$1,000 of property value.

Some states trigger extra costs when the purchase price exceeds a certain threshold. For example, Connecticut charges 1.25% in taxes on any portion of home value above $800,000. These additional (non-commission) costs do add up and usually cost the seller another 2% to 5% of the sale price at closing.

2. You potentially reduce the taxable portion of the capital gain on your home sale

If the cash you plan to pocket from your home sale pushes you over the threshold for the capital gains tax exemption, accepting a price reduction rather than a closing cost credit may reduce the taxable portion of your gain.

To calculate your capital gains, you would take the sale price of the home minus selling fees, subtract your adjusted cost basis (i.e., the original price of the home plus capital improvements), and the resulting number is what the government views as your “gain.” 

If that gain is lower than $250,000 for single filers or $500,000 for married taxpayers filing jointly, and you meet the use and ownership tests, then you don’t owe capital gains up to those thresholds. If you exceed that exemption threshold, however, you’ll either need to pay short-term capital gains, taxed as ordinary income, or long-term capital gains, taxed at the graduated thresholds of 0%, 15%, or 20%.

If you’ve owned the home for a year or less, you’ll owe short-term capital gains. If you owned the home for longer than that, you’ll qualify for the long-term capital gains rate.

But in essence, depending on a multitude of factors, a higher sale price with a closing cost credit could either push you over the exemption threshold, or it could increase the amount of your gain — thereby increasing your taxes owed on the sale. When in doubt, talk to a skilled CPA about the tax ramifications of your decision.


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