Seller concessions are commonly made in homebuying, often to sweeten the deal for buyers and make it easier for both parties to close on a deal. For instance, a buyer may ask for credits toward certain closing costs or repairs. In some cases, this can help ensure that the buyer is able to get into his or her dream house without having to come up with extra funds at closing time.
This article will delve into the background, purpose, and impact of seller concessions, list the pros and cons to buyers and sellers, and present expert opinions.
Understanding Seller Concessions
Seller concessions, sometimes called seller contributions or seller assist, refer to an agreement in which the property seller agrees to cover certain costs on behalf of the buyer. The lender typically determines the amount of seller concession allowed, and it won’t exceed a certain percentage of the purchase price.Get a Quote
Types of seller concessions.
Seller concessions can come in many forms. Some of the most common types of seller concessions include:
- Closing cost credits. A credit given by the seller to cover some or all of a buyer's closing costs.
- Mortgage points: A one-time payment from the seller to buy a discount point, which lowers the interest rate on a loan.
- Credit for repairs: A credit given by the seller to cover specified repairs to be completed after the home purchase.
- Home warranty: The seller may provide a warranty on the property, which can be transferred to the buyer at closing.
- Title insurance: The seller may contribute to the cost of title insurance, providing an additional layer of protection for both parties in a real estate transaction.
Purpose of seller concessions.
In a buyer's market, seller concessions can serve as an additional incentive to attract potential buyers. They can also facilitate closing deals by addressing the financial constraints buyers might face. Other purposes include:
- Making the transaction more appealing financially
- Speeding up the selling time
- Bridging gaps between the buyer's loan amount and the asking price
Importance of Seller Concessions for First-Time Homebuyers
Seller concessions are especially important for first-time homebuyers because they can help them afford a home that may otherwise be beyond their reach. In addition to lowering the amount of cash needed at closing, concessions can provide buyers with money for repairs or for interest rate discount points. These concessions can add up quickly and provide a much-needed cushion for first-time buyers struggling financially or lacking access to traditional financing options.
For example, if a seller offers credits for closing costs and repairs, a first-time homebuyer may be able to use those credits to cover the cost of an inspection or appraisal. This could remove a financial barrier to homebuying at a time when people are saving as much money as they can for a down payment.
Furthermore, seller concessions can make it easier for first-time homebuyers to qualify for mortgages. Many lenders require buyers to have a certain amount of cash available at closing, and seller concessions can help buyers meet that amount by saving other expenses.
Analysis of Seller Concessions: Stakeholder Perspectives
Understanding the potential benefits and drawbacks of seller concessions for both buyers and sellers is critical in making well-informed decisions.
Buyer's perspective: Pros
Lower Out-of-Pocket Costs
Seller concessions can be a great solution for buyers looking to save costs at closing. Seller credits toward closing costs and repairs can dramatically reduce the money a buyer must pay out of pocket.
For example, if a buyer needs $6,000 in closing costs but only has $4,500, a seller concession of $1,500 could bridge that gap and allow the transaction to proceed. This could mean the difference between purchasing an entry-level home or one with additional amenities and upgrades.
Ability to Borrow Less Money
Seller concessions can be a great way for buyers to borrow less money. Given the high price tag of homes and the 30 years that a mortgage typically lasts, every dollar not borrowed counts.
For example, let’s say the seller agrees to contribute $2,000 towards closing costs and the buyer plans to roll all those costs into the loan. For a $200,000 home with 5% closing costs, closing would be $10,000. Thanks to the seller concession, though, the buyer only needs to roll $8,000 into the loan.
More Purchasing Power
When negotiating seller concessions, buyers may be able to afford a more expensive home. That’s because seller credits toward closing costs, repairs, and other services allow buyers to redirect the money they would have spent on those things to the home purchase itself.
Incentive to Close
If buyers struggle to make the required down payment or meet closing costs, seller concessions can push them closer to closing the deal. This can be a great incentive for buyers who are reluctant to commit but still interested in the property.
Many types of seller concessions are tax deductible, which can provide an additional layer of savings for the buyer. For example, mortgage points are tax deductible in most cases, so if the seller pays some or all of the points on behalf of the buyer, the buyer will be able to deduct them from his or her taxes.
Buyer's perspective: Cons
Some lenders have caps on the amount of seller concessions that a buyer can receive. Concessions exceeding the cap could lead to loan denial or renegotiation of the sale contract. This is because lenders are wary of buyers who are relying too heavily on seller concessions to finance their home purchase, since it might indicate that they are not financially prepared for homeownership.
Generally, most conventional lenders will only allow up to 3% of the purchase price in seller concessions; however, these limits may vary depending on the lender and loan program. For example, some FHA loans allow up to 6% in seller concessions. In addition, VA loans and USDA Rural Development loans have even higher concession limits (up to 9%) due to their more flexible guidelines. It is important for buyers to check with their lender before signing a sales contract to understand how much they can accept in concessions.
Higher Asking Price
Sellers might dangle a concession to attract buyers but increase their asking price to offset it, so the buyer really doesn’t benefit. Therefore, buyers should carefully consider whether any offered concessions are worth it before accepting them.
Seller's Perspective: Pros
Higher Buyer Demand
Offering concessions can help sellers attract more buyers and increase the demand for their property. This can be particularly important in slower markets, when competition among sellers is fierce and when a home might be on the market for some time without much activity. By adding attractive concessions to the listing, such as paying closing costs or making repairs, sellers may be able to entice buyers who cannot afford to purchase a home without them.
Offering concessions can be a powerful tool for sellers by making their home more attractive to buyers. The more buyers who are interested, the better the chance of finding the right buyer. Additionally, this increased marketability also helps sellers stand out in a competitive market and make their homes more appealing than others in the same price range.
Seller's Perspective: Con
Although offering concessions may attract more buyers and facilitate the sale, it also comes at an expense to the seller. After all, when the seller agrees to pay closing costs or points on behalf of the buyer, they will have to bear these costs themselves. In addition, making repairs or other improvements to the property would also require an upfront expense by the seller.
Expert Opinions and Supporting Evidence
Many real estate experts emphasize that both buyers and sellers must carefully consider the implications of concessions. While they can help close deals, they may also inadvertently result in higher prices or longer negotiations.
Some loan programs stipulate restrictions on seller concessions. Sellers should be mindful of these limitations to avoid jeopardizing the deal.
Recommendations and a Way Forward
When considering seller concessions, the following recommendations can help you.
- Do your research: Examine the interest rates, market trends, and comparable sales; and assess the local landscape to understand where concessions fit.
- Seek professional advice: Sellers should consult with a real estate agent or loan officer to understand the consequences of offering concessions.
- Have a budget: Sellers should know how much you can afford in concessions and plan accordingly.
- Be aware of legal issues: Make sure the proposed concessions do not violate any laws and are disclosed properly on all contracts.
Final Thoughts on Seller Concessions
Seller concessions can help facilitate the sale of a home, attract more buyers, and improve marketability. However, it is important for both buyers and sellers to consider whether any proposed concession terms are really worth it before agreeing to them. Ultimately, it is important to weigh the pros and cons of concessions to make an informed decision that will benefit both parties.Get a Quote