Closing Cost Credit vs Price Reduction: Why a Price Drop Is Smarter

Closing cost credit vs price reduction

For buyers, 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.

Meanwhile, many sources online 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.”

Generally speaking, a price reduction lowers the home’s final sale amount, while a closing cost credit adds an extra expense that the seller agrees to cover at closing. In some cases, a lower purchase price can also reduce seller-paid costs tied to the sale amount, such as agent commissions or transfer taxes. As a result, accepting a slightly lower offer upfront may leave more money in the seller’s pocket than agreeing to a higher offer with credits attached.

Let’s explore further 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.

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 lower 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’ve owned the home for at least two years and lived in it for at least two full years, 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 tax. 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 implications of your decision.

3. Your buyer could be on shaky financial ground

When a buyer makes a request for a closing cost credit, this can sometimes be a red flag that they’re stretching their financial means. This isn’t always the case, as some could just be using a closing cost credit request as a negotiation tactic. And who doesn’t like to save money at closing?

However, it’s possible that a buyer asks for credit because their savings may be thin, and it’s not guaranteed that they can gather enough funds to close.

“It’s most often used with buyers [who] have very little available liquid cash, or they want to direct their savings account to the down payment rather than to closing costs,” explains Fuller.

“If a buyer is asking for a closing costs credit, the seller may want to look at the buyer’s finances to determine whether or not they have the liquidity to complete the transaction.”

Buyers with tighter budgets may be more likely to run into hiccups along the way, whether that’s financing delays, appraisal issues, or unexpected costs popping up before closing. Accepting a lower purchase price instead can sometimes keep the deal simpler, rather than tying it more closely to how much cash the buyer has left to work with.

4. You avoid the risk of a low appraisal

Let’s say you’ve listed your home at the higher end of its value range. Now a buyer comes in and bids over-asking in exchange for a closing cost credit. This type of scenario can lead to trouble with the home appraisal.

A lender is only going to finance a home up to its appraised value. If an appraiser deems a home to be worth less than the price agreed on in the contract, the buyer and seller will have to make up the difference in funds somehow.

“Low appraisals are a real problem because real estate values have been appreciating across the country for several years,” says Fuller. “When an appraiser finds other properties that have sold six months ago, they’re almost always at a lesser sales price than what a buyer is willing to pay for a home in today’s market.”

While you may be netting the same proceeds with Offer A and Offer B, on paper, Offer A has a higher sales price of $250,000, which means that your buyer has to get a loan approved at that higher value. If the appraisal comes in lower than the sales price, the credits will not factor into the loan approval.

Common mistakes sellers make when reducing the home price

A price reduction can sometimes be the cleaner option, but that doesn’t mean every price cut is a smart one. Sellers often assume lowering the number will automatically attract buyers, only to end up weakening their negotiating position or leaving money on the table. Here are some of the most common mistakes sellers make when reducing a home’s price.

• Slashing prices too drastically: Dropping the price too much in one big cut can backfire, making buyers wonder if something’s wrong with the home instead of seeing it as a good deal.
• Failing to conduct thorough market research: It’s also easy to miss the mark if you’re not looking at real market data. Without comparing similar homes and current trends, a price cut can end up looking random rather than strategic and accurate, turning off buyers.
• Timing the price reduction poorly: Pricing adjustments should be strategically timed to align with market conditions, not impulsively made based on temporary circumstances.
• Disregarding buyer feedback: If your home isn’t getting offers, it’s worth looking at buyer feedback before rushing into a price cut. The problem might not be the price at all. It could be the home’s condition, outdated photos, staging choices, or simply your marketing strategy.
• Reacting too quickly to low offers: It’s important to engage in negotiations rather than immediately lowering the asking price in response to lower-than-expected offers, as this can undermine the perceived value of the home.

My house isn’t selling: Should I offer a closing cost credit or a price reduction?

Usually, it’s the smarter play for sellers to accept a price reduction over a closing cost credit. But what if your house isn’t selling?

Deciding which option is better often depends on the price brackets online. Several homebuyers typically start their search online, with 46% saying that their first step was to look for properties on the internet. Here’s when lowering your price can boost your listing visibility and when a closing cost credit may be the better incentive.

When to lower your price

Price brackets are one of the primary filters buyers use to find potential properties. These brackets are generally divided by $50,000 to $100,000 increments. Changing your list price is a wise idea if it will land your listing in a new price bracket.

For example, let’s say your home, listed for $255,000, isn’t selling. A $5,000 closing cost credit isn’t going to help much because your list price remains at $255,000, which is just outside the $250,000 bracket.

In this scenario, it’s better to reduce your price by $5,000 rather than offer a $5,000 closing cost credit. A price reduction that puts you in a new bracket opens your listing up to a whole new pool of buyers. And in the end, your take home proceeds will be the same.

When to offer a credit instead

But there’s another scenario to consider: “If you’re not on the edge of a bracket, it’s oftentimes wiser to offer a $5,000 credit to attract buyers rather than to make a price adjustment,” advises Fuller.

When you reduce the price, some buyers consider that to be a red flag about the quality of the home. A closing cost credit can feel more like an incentive or bonus, like throwing in the pool table or sectional sofa.

And for the reasons we discussed before, buyers appreciate credits for their immediate savings at closing. Think about it: the money a buyer saves on escrow and lender fees can instead go toward furnishing their new home.

Should you reduce your price or offer credits?

Ultimately, whether to lower your home price or provide closing credits depends on your goals, talks with the buyer, and the current market conditions. A price reduction can attract more buyers and improve affordability, while closing credits offer immediate savings. To make the best decision for your situation, partner with a top-performing agent in your locale.

Editor’s note: The information in this blog post is for educational purposes only, not legal or professional tax advice. For guidance on your individual situation, consult a skilled lawyer or CPA.

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