You can now actually apply the principle you have learnt in the Finance class 101. Here it the gist of what Time Value of Money means to a buyer in a real estate transaction.
In a real estate transaction, everything is NEGOTIABLE. We do not just negotiate on the price but the terms such as closing date, closing costs, option fee, earnest money and who pays for what in the transaction.
Let's understand this Time Value of Money concept in terms of the closing costs.
As a buyer, you can negotiate the closing costs ie Seller having to contribute to your closing cost in a real estate transaction instead of taking that amount (say $500 for example) towards the price reduction.
Why is that?
The answer is the Time Value of Money recognized today is not the same as if it was taken over a long period (30 years, in terms of a mortgage note for example). The $500 seller contribution towards closing cost will net what you need to bring ($500 less) to the closing table. If you have asked for a price reduction, $500 you are paying $2 less a month in your monthly payment. A rather small amount that will not make or break your monthly household budget.
Also, $500 is worth $500 today rather than the $500 spreaded over the life of the loan.
So, when you negotiate a real estate contract, do consider asking for some closing costs even after the price has been agreed upon. It probably be worth more today than many years from now.
So, when you negotiate a real estate contract, do consider asking for some closing costs even after the price has been agreed upon. It probably be worth more today than many years from now.
