Doubts arise on closing-cost relief

April 23, 1995|By Lorraine Mirabella | Lorraine Mirabella,Sun Staff Writer

The real estate industry is divided over whether first-time homebuyers will see substantial savings under Maryland's newly passed closing-cost reduction law.

The state projects savings of more than $2,000 in some cases for first-time buyers -- those targeted for the most relief from the state's high settlement costs.

But about half the savings hinges on sellers' willingness to pick up more of the costs than they do now.

A portion of the measure passed by the General Assembly earlier this month focuses on state and local transfer and recordation taxes. In Maryland, buyers and sellers have customarily split those costs, although they're negotiable. In fact, most printed sales contracts stipulate that buyer and seller share the costs.

The new law exempts first-time buyers from their half of the state's one-half percent transfer tax on the purchase price. Sellers must continue paying their half, or a quarter-percent of the purchase price.

But the law that takes effect Sept. 1 also presumes that sellers will pay local taxes for first-time buyers, unless otherwise negotiated. Local transfer taxes in some jurisdictions are higher than the state transfer tax, with the highest at 1.6 percent in Baltimore County.

Some in the industry disagree about whether the provision will work as intended and allow more first-time buyers to purchase homes by reducing cash needed up front,thus stimulating the market and helping sellers.

Patricia M. Savani, president of the Anne Arundel County Association of Realtors, believes the savvy seller will agree to pick up local costs when a buyer qualifies but has trouble coming up with settlement cash.

The seller would then factor that amount into the purchase price to make up the amount. Such an arrangement would benefit the buyer as well as the seller, Ms. Savani said.

A buyer with little savings would get cash for settlement, she said.

If local taxes came to $1,000, for instance, "if it's built into the purchase price, it's good for the purchaser because it would take too long to save $1,000," she said. "If you only have to pay $7 or $8 a month to borrow, that's a better deal. For most young families, accruing a large amount of cash is the problem. This allows them to use their purchasing power."

Even a $2,000 price increase would cost a borrower about $2,500 over the life of a 30-year loan, given an interest rate of

between 7 percent and 7.5 percent, said Anil Kshepakaran, a loan originator for Signet Mortgage.

"It's not a major impact on buyers," Mr. Kshepakaran said. "Everybody these days is looking for cash help, that's what we're finding. People would rather pay a higher monthly payment than come up with an extra $2,000."

Sellers who do agree to pick up closing costs for buyers have little choice these days but to raise the purchase price, he said.

"Sellers don't have enough equity to say, 'I'll be happy to pay,' " he said. "That has happened because of refinancing and cash-out home equity loans. There's less and less equity to be playing with."

But because the law still allows negotiation of local transfer taxes, little will change, others believe. Real estate agents who represent sellers said they'll continue advising clients to state in a sales contract that seller and buyer split local taxes. That would mean first-time buyers would not get the intended benefit.

D. R. Grempler, president of Towson-based Coldwell Banker Grempler Realty Inc., said the state has unfairly shifted the burden of closing costs to sellers, rather than actually reducing taxes.

Sellers, he said, will not go along with that.

"I can't see sellers saying, 'Yes sir, Mr. Government, I'll pay that,' " Mr. Grempler said. "You're asking sellers to give away their money. The seller giving money to the buyer is not going to happen. It's human nature."

But the market might ultimately decide who pays for what.

"If it's a depressed real estate market, it's much more likely the seller will be willing to pay the taxes and fees to make the sale," said Karl O. Gilbert, state and local policy director for the National Association of Realtors. "If it's booming, and there's a lot of activity and less product available, it's more likely the buyer will pay a large share of the costs."

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