A closing credit is money paid to the buyer by the seller at the closing table. If that sounds backwards, it is. The amount can be several thousand dollars and it’s a way of reducing the price of the property for the buyer while keeping the recorded sales price higher for the seller.
This can be valuable for developers who need to sell multiple units, or for co-op buildings that want to protect shareholders' value and don’t want to impact the listing price of other apartments in the building.
When the market softens, as it has during the pandemic, particularly in Manhattan, sellers want to sweeten the deal for buyers and closing credits are one way of doing this. Other concessions include paying the common charges for a period of time or paying the transfer tax for the buyer.
Jeff Reich, a real estate attorney at Schwartz Sladkus Reich Greenberg Atlas, says it’s a tool that’s often used “when there’s a disconnect between what the board thinks the unit should be valued at, and what the market says it is.” Prices have fallen at some full-service buildings with shared amenities in favor of apartments with home office space and more privacy.
[Editor's note: An earlier version of this post was published in January 2019. We are presenting it again with updated information for February 2021.]
When closing credits make sense
Warner Lewis, a broker at Brown Harris Stevens, recently negotiated the sale of a one-bedroom condo in Williamsburg that included a $25,000 credit at the closing. This amounted to 50 percent of the buyer’s closing costs.
Reich’s firm has also handled sales where closing credits were part of the deal including the sale of a property that was in estate condition and needed substantial renovation work. He admits closing credits won’t make sense for everyone and points out lenders are currently limiting what they will accept in the way of closing credits to 3 percent of the purchase price.
The sales contract must spell out the deal but even so, David Pfeffer, an attorney at Tarter, Krisky and Drogin, says the use of closing credits is not without risk.
“If you misrepresent the price in a closing document, that would be a fraud,” he says. He also disputes whether it is helpful for the buyer or seller when the transaction involves a resale.
“Both parties are going to want to show a lower sales price; the seller because it reduces the transfer tax; and the buyer because taxes are based on sales price,” Pfeffer says.
However closing costs might sway a deal on a resale, particularly if there is a tax abatement on the building, which there was on the one bedroom in Williamsburg, which sold with $25,000 in credits.
Reich says there may still be questions about how to deal with broker commission and transfer taxes but there’s no fraud if the contract is clear about the deal.
“If this is a sale from a sponsor, in most plans the sponsor is not required to obtain a waiver of right of first refusal so the condo board may not find out. But it should be disclosed to a purchaser’s lender.”
Impact on the market
Another consequence of closing credits is the skewing of market data. Without knowing the underlying terms of a sale, the next buyer (or mortgage lender) may believe the apartment is more valuable than it actually is.
“It should affect the market analysis because it really is a reduction of the purchase price,” says Elise Kessler, a real estate attorney with Braverman Greenspun. However, she points out closing credits are not disclosed to the outside world so it is unlikely an appraiser would know about a closing credit.
In terms of the consequences for the next buyer in a building, Reich says there are plenty of variables that go into the valuation of a unit. “Appraisals aren’t just based on the value of one other apartment in the building,” he says, adding that closing credits probably don’t happen widely enough to skew the market but it does affect the data for the building.
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