Seller Concessions
Seller concessions are contributions made by the seller towards the buyer's closing costs, reducing the amount of cash the buyer needs to bring to the closing table. These are negotiated as part of the purchase agreement and are subject to lender-imposed limits.
Key Takeaways
- Seller concessions are funds paid by the seller towards the buyer's closing costs, reducing the buyer's upfront cash requirement.
- Lenders impose strict limits on concessions, varying by loan type (conventional, FHA, VA) and down payment percentage.
- For buyers, concessions preserve cash and can make homeownership more accessible, but may lead to a higher financed amount.
- For sellers, concessions can attract buyers and expedite sales, especially in slower markets, while avoiding a direct price reduction.
- Negotiating concessions requires understanding market conditions and lender guidelines to ensure a smooth transaction and avoid appraisal issues.
What Are Seller Concessions?
Seller concessions refer to a portion of the buyer's closing costs that the seller agrees to pay. These are negotiated between the buyer and seller and are typically used to make a deal more attractive to a buyer, especially in a buyer's market or when a buyer has limited cash reserves. Concessions can cover various expenses, including loan origination fees, appraisal fees, title insurance, and property taxes, but they are subject to strict limits imposed by lenders and loan programs.
How Seller Concessions Work
When a buyer and seller agree on a purchase price, they can also negotiate seller concessions. Instead of reducing the home's list price, the seller agrees to contribute a specified amount or percentage towards the buyer's closing costs. This amount is then credited to the buyer at closing, effectively reducing the cash the buyer needs to bring to the table. It's crucial to understand that seller concessions do not reduce the loan amount; they reduce the out-of-pocket cash required by the buyer.
Types of Concessions
- Closing Costs: This is the most common type, covering fees like loan origination, appraisal, credit report, title insurance, attorney fees, and recording fees.
- Discount Points: Sellers can pay discount points on behalf of the buyer to reduce the buyer's interest rate, making monthly payments more affordable.
- Prepaid Expenses: These include property taxes, homeowner's insurance premiums, and HOA dues that are paid in advance at closing.
- Repair Credits: Instead of the seller completing repairs, they might offer a credit to the buyer to cover the cost of necessary fixes after closing.
Lender Limitations
Lenders impose strict limits on the amount of seller concessions allowed, typically expressed as a percentage of the purchase price. These limits vary by loan type and the buyer's down payment percentage. For instance, conventional loans often allow 3% for down payments less than 10%, 6% for 10-25% down, and 9% for over 25% down. FHA loans generally cap concessions at 6%, while VA loans allow up to 4% of the loan amount for specific fees. These limits are in place to prevent inflated home prices and to ensure the buyer has sufficient equity.
Benefits and Drawbacks for Buyers and Sellers
For Buyers
- Reduced Upfront Costs: The primary benefit is lowering the cash needed at closing, making homeownership more accessible.
- Preserve Cash Reserves: Buyers can save their cash for emergencies, renovations, or other investments rather than spending it all on closing.
- Lower Interest Rate: If concessions are used for discount points, the buyer can secure a lower interest rate, reducing monthly mortgage payments.
For Sellers
- Attract More Buyers: In a buyer's market or for properties that have been on the market for a while, concessions can make a property more appealing.
- Close Faster: By helping buyers overcome financial hurdles, concessions can expedite the sale process.
- Avoid Price Reduction: Sellers can maintain their asking price while still offering an incentive, which can be psychologically more appealing than a direct price cut.
Potential Downsides
- Higher Purchase Price: Often, the concession amount is rolled into a slightly higher purchase price, meaning the buyer finances the concession over the life of the loan.
- Appraisal Issues: If the purchase price is inflated to cover concessions, the property might not appraise for the higher value, jeopardizing the loan.
- Reduced Net Proceeds for Seller: While avoiding a direct price cut, the seller's net proceeds from the sale will be lower due to the concession.
Navigating Seller Concessions: A Step-by-Step Guide
Whether you're a buyer seeking to reduce upfront costs or a seller looking to sweeten a deal, understanding the process of negotiating and utilizing seller concessions is key.
- Understand Market Conditions: Buyers should assess if it's a buyer's or seller's market. In a buyer's market, sellers are more likely to offer concessions. Sellers should consider their property's appeal and time on market.
- Determine Your Needs/Goals: Buyers should calculate their estimated closing costs and how much cash they need to preserve. Sellers should decide how much they are willing to concede without significantly impacting their profit margin.
- Negotiate the Concession: Buyers should include the requested concession amount in their initial offer. Sellers can counter with a lower concession or a slightly higher purchase price to offset the cost.
- Ensure Lender Approval: Buyers must inform their lender about any requested concessions. The lender will verify that the concession amount adheres to the specific loan program's limits and that the property appraises for the agreed-upon value.
- Finalize the Agreement: Once agreed upon, the seller concession must be clearly documented in the purchase agreement and reflected on the Closing Disclosure at settlement.
Real-World Examples of Seller Concessions
Example 1: First-Time Homebuyer with Limited Cash
A first-time homebuyer, Sarah, finds a home listed for $350,000. Her estimated closing costs are $10,500 (3% of the purchase price). She has enough for a 5% down payment ($17,500) but is short on cash for closing costs. She offers $350,000 for the home, contingent on the seller providing a $7,000 concession towards her closing costs. The seller agrees.
- Purchase Price: $350,000
- Down Payment (5%): $17,500
- Total Closing Costs: $10,500
- Seller Concession: $7,000
- Buyer's Out-of-Pocket Closing Costs: $10,500 - $7,000 = $3,500
- Total Cash Needed at Closing: $17,500 (down payment) + $3,500 (remaining closing costs) = $21,000
In this scenario, Sarah saved $7,000 in upfront cash, making the home purchase feasible. The $7,000 concession is within the typical 3% limit for conventional loans with a 5% down payment.
Example 2: Seller in a Slow Market
John is selling his investment property for $400,000 in a market where homes are sitting for longer. He has received an offer for $395,000, but the buyer is asking for a $10,000 seller concession to cover closing costs. John's real estate agent advises that a $10,000 concession might be more appealing than a $15,000 price reduction to $385,000, as it keeps the perceived value of the home higher.
- Original Asking Price: $400,000
- Buyer's Offer with Concession: $395,000 purchase price + $10,000 seller concession
- Seller's Net Proceeds (before other costs): $395,000 (sale price) - $10,000 (concession) = $385,000
By agreeing to the concession, John effectively reduces his net proceeds by $10,000, but he secures a sale at a higher nominal price, which can be beneficial for neighborhood comps and his perceived property value. The $10,000 concession is 2.5% of the $400,000 original price, well within typical lender limits.
Frequently Asked Questions
Are there limits to how much a seller can concede?
Seller concessions are typically capped by the lender and loan program. For conventional loans, limits range from 3% to 9% of the purchase price, depending on the buyer's down payment. FHA loans generally cap concessions at 6%, and VA loans at 4%. It's crucial for both parties to confirm these limits with the buyer's lender to avoid issues at closing.
Do seller concessions increase the overall cost of the home for the buyer?
While seller concessions reduce the cash a buyer needs at closing, they often result in a slightly higher purchase price. This means the concession amount is effectively financed over the life of the loan, potentially increasing the total interest paid. Buyers should weigh the benefit of reduced upfront costs against the long-term cost of a larger loan.
Can seller concessions affect the home appraisal?
Yes, seller concessions can impact the appraisal. If the purchase price is inflated to accommodate a large concession, the property might not appraise for the higher value. Lenders base their loan amount on the appraised value, so a low appraisal could force the buyer to cover the difference or renegotiate the deal.
When are seller concessions most commonly used?
Seller concessions are most common in a buyer's market, where sellers need to offer incentives to attract buyers. They are also prevalent when buyers have strong credit but limited cash for closing costs, or when a property has been on the market for an extended period. In a hot seller's market, concessions are less common as sellers have more leverage.
What are the main risks associated with seller concessions for both parties?
For sellers, concessions reduce their net proceeds from the sale. While it might help secure a deal, it directly impacts the cash they walk away with. For buyers, the main risk is potentially overpaying for the property if the concession is rolled into an inflated purchase price, which could also lead to appraisal issues.