Let’s talk about seller concessions! Oftentimes, home buyers will negotiate seller concessions into their purchasing contracts in order to reduce their closing costs (money owed upfront at the closing table). Because those costs can add up to a few thousand dollars, this can be a game changer for buyers when it comes to affordability. Much like anything else, there are both advantages and disadvantages to negotiating seller concessions. Let’s talk about it.

 

What are seller concessions?

 Let’s first discuss what seller concessions are and the legal limitations associated with them. Seller concessions are when the seller agrees to pay the buyer’s closing costs as defined in the contract. This can either be the seller contributing to specific closing costs, or a percentage of the total closing costs. 

 

Examples of closing costs that can be covered by the seller:

  • Property taxes
  • Title insurance
  • Loan origination fees
  • Inspection fees
  • Recording fees
  • Appraisal fee
  • Attorney’s fee
  • Points

Once a buyer applies for a mortgage loan from a trusted lender, they will provide them with a loan estimate that will also include an itemized list of closing costs and their totals. If the buyer plans to negotiate seller concessions, they should work with their real estate agent on which costs/what percentage of the costs they would like the seller to cover. Keep in mind that the seller has no obligation to provide concessions. Just like everything else in real estate, they are negotiable! Of course, there are limitations on how much the seller can pay for by law. There are also varying limitations depending on which loan product the buyer is under (Conventional, FHA, VA, etc.). See below.

Limitations on Conventional Loans

The limit on conventional loans is dependent on the buyer’s down payment amount.

  • Less than 10% down payment, the seller can contribute up to 3%.
  • 10 – 25%, the seller can contribute up to 6%.
  • More than 25%, the seller can contribute up to 9%.
  • For all investment properties, the seller’s contribution is limited to 2% (no matter the amount of the down payment).

Limitations on FHA Loans

The seller is allowed to contribute up to 6% of the appraised value on all FHA Loans. Keep in mind that the seller can never contribute more than the amount of the closing costs (on any loan product). For example: If 6% of the appraised value is equivalent to $9,600, but the closing costs only add up to $4,000, the seller would only be able to provide up to $4,000.

 

Limitations on VA Loans

The seller can contribute up to 4% of the appraised value, and may also cover the funding fee associated with this loan type.

 

Limitations on USDA Loans

The seller can contribute up to 6% of the buyer’s loan amount. This is the one loan type where the seller concessions are not based on the home price/appraised value.

 

 

The advantages of Seller Concessions:

 

Buyers:

The advantages of seller concessions when it comes to buyers is relatively straight-forward. As a buyer, it is standard that they will need some sort of money upfront to cover the down payment and closing costs. This can add up to thousands of dollars. Seller concessions can significantly reduce this upfront amount, allowing the buyer to hold on to their cash savings as they venture into home ownership. 

Sellers:

The advantages to the seller may not seem so black and white. Why would the seller want to PAY a part of the buyer’s obligations? Sometimes sellers find themselves in situations where they must urgently sell. This can speed up the process/make the process more affordable for prospective buyers. If the home has sat on the market for a while, this could be a good way to give it the nudge it needs to sell. The other advantage for the seller is that this expense is considered a tax write-off when it comes to tax season - reducing their taxable income. 

 

The disadvantages of Seller Concessions:

 

Buyers:

In most situations, seller concessions are more prominent in a buyer’s market. In a seller’s market, negotiating seller concessions may hurt the buyer’s chances in a multiple offer situation. Oftentimes this offer will look weak next to competing offers that are not negotiating seller concessions. This is why it is vitally important to have a knowledgeable agent that will know how to work with you to write an offer that will shine (even if it includes seller concessions)! It happens all the time, regardless of the state of the market. 

 

Sellers:

The obvious disadvantage is paying an amount that the seller otherwise would not have had to pay. However, sometimes the advantages outweigh the disadvantages. Every situation is unique in the real estate world!

 

 

 

 

 

Real Estate Agents are not trained or licensed to provide legal, lending or tax advice. Always be sure to reach out to a lawyer, lender or tax professional for information specific to taxes, mortgages or legal concerns. Please call us or email us if you need recommendations for a professional in your area.

 

 

Author: Haley Elder, Marketing Manager

 

Salt + Stone Property Group