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Closing credits: What are they and why would you negotiate for them?

The details are spelled out in a rider to the contract.

Emily Myers/Flickr

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A closing credit is a sum of money paid to the buyer by the seller at closing. If that sounds topsy-turvy, it is. The figure 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.

As the market softens, more and more sellers are throwing in concessions like paying common charges and transfer taxes. Closing credits are another sweetener they can use to seal the deal.

Jeff Reich, real estate attorney at SSRGA, says he’s also seen a noticeable increase in clients asking about closing credits. “It’s always been a tool when there’s a disconnect between what the board thinks the unit should be valued at, and what the market says it is. That’s exacerbated in the current market.”

When closing credits make sense

Reich’s firm recently handled the sale of an estate where closing credits were part of the deal.

“The property was in true estate condition,” he says, “and would have traded for less than the other units in the building.” He admits closing credits won’t make sense for everyone. ”If you have a lender involved or a co-op board, they might not go for it, but some think it’s a favorable deal.”

The sales contract must spell out the deal but even so, attorney David Pfeffer of Tarter, Krisky and Drogin says using closing credits are 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—is going to want to be sure that the tax records reflect the lower price rather than the higher price.” Reich says there will 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.

Elise Kessler, real estate attorney with Braverman Greenspun, says while she’s aware of closing credits, it’s not something she’s seen recently. “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 of buyer (or mortgage lender) may believe the apartment is more valuable than it actually is.

“It would definitely affect the market analysis because it really is a reduction of the purchase price,” says Kessler.

Reich doesn’t believe closing credits are being used frequently enough to make a real difference. “It probably doesn’t happen enough to skew the market but definitely the building,” Reich says. 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.