Have you heard of seller concessions? They aren’t always common, but seller concessions can be a great tool for sellers who are looking for a quick sale and for buyers who could use help offsetting the upfront costs of closing on a home. Before you get too excited, it’s important to fully understand what seller concessions are and when to request them. This guide will help you get started.
What Are Seller Concessions?
Seller concessions are the closing costs that the seller has agreed to pay. The seller may offer to pay a percentage of the total closing costs. In some cases, the homebuyer might also ask the seller to pay for specific closing costs, such as a home or pest inspection.
How Do Seller Concessions Work?
Typically, seller concessions are negotiated by the buyer’s real estate agent. The real estate agent will approach the seller’s agent with the request and the two agents will work with their clients and come to an agreement. There are a few ways seller concessions can be paid out.
One of the most common ways this works is by the seller simply receiving less of the profit from the sale of the home. If the seller stands to earn $150,000 from the sale but agrees to pay $5,000 in concessions, they will receive $145,000 instead.
Another way seller concessions can work is by the seller agreeing to pay a certain amount in exchange for raising the home’s purchase price. The amount is rolled into the mortgage loan amount, and the home must appraise for the higher price in these situations. For example, if the initial sale price of the home is $175,000 and the seller agrees to pay $5,000 in concessions, the price of the home is raised to $180,000. This method ultimately charges the seller concessions back to the homebuyer.
Types of Closings Costs a Seller Concession Covers
Several fees go into the total closing costs of a home. Some types of closing costs that a seller concession might cover include:
- Transfer taxes and recording fees: These are harges imposed during the process of transferring ownership of a property.
- Real estate attorney or agent fee: The fee charged by real estate attorneys or agents (a real estate attorney is required in some states) to prepare and review the agreements and contracts associated with the home purchase
- Inspection fees: The cost of hiring a professional inspector to perform an inspection of the home
- Home warranty: An optional contract that covers the repair or replacement of essential household appliances and systems within a specified time frame
- Outstanding mortgage or lien payments on the property: A claim on the property that is related to an unpaid debt. If one is found, the seller may agree to pay this off to make the closing process smoother.
- Title insurance: Protects lenders and the new homeowners if a lien arises that did not come up during the initial title search
- Agreed-upon credits or allowances for repairs or upgrades: If the seller acknowledges that specific repairs are needed, they might agree to pay for the repairs up to a certain amount
- Property taxes: Homebuyers should expect to pay the cost of the property taxes for the remainder of the year at the time of closing
- Homeowners association (HOA) fees: If the home is involved in an HOA, the seller should provide documentation and may offer to cover the cost of the HOA fees
Pros of Seller Concessions
Seller concessions can be a great advantage to buyers. It can help buyers save money by reducing the upfront costs of closing on their new home. In some cases, it can also help buyers afford a higher-priced home, although the buyer should be careful not to get themselves into mortgage payments that they can’t afford in the long run.
Sellers can also benefit from concessions. If the seller is in a hurry to sell the home, offering concessions can help them make their home more attractive to potential homebuyers. It can also help speed up the closing process.
Cons of Seller Concessions
Though it might sound like a win-win situation, there are factors that homebuyers should consider before asking for seller concessions. The first is that if it’s a seller’s market, asking for seller concessions could take the buyer out of the running if the seller can find a more favorable buyer. Buyers should also be cautious of the long-term implications of accepting seller concessions. Even though seller concessions can lower the upfront costs of purchasing the home, it can lead to higher mortgage payments later.
How to Negotiate Seller Concessions
Before asking for seller concessions, it’s important to understand current market conditions. It’s also a good idea to understand as much about the seller’s home as possible. If the market is a seller’s market, it can be difficult to get seller concessions. But if the seller’s house has been on the market for a while, buyers may have more negotiating power, even if it is a seller’s market.
Buyers who are interested in asking for seller concessions should work closely with their real estate agent. The real estate agent can research similar properties that have been sold recently with concessions. They can also help buyers formulate their requests in a way that will be most persuasive to the sellers. It’s important to understand that sellers are usually not looking for a complicated sale, so you should carefully consider how many requests you are making along with your offer.
Limitations of Seller Concessions
Seller concessions have some general limitations, including the fact that sellers cannot pay off all of the buyer’s closing costs. There are some additional limitations based on the loan type as well.
1. Conventional Loans
With conventional loans, the seller concession limits depend on what the down payment is on the house. For down payments of less than 10%, the seller can contribute up to 3%. For 10% to 25%, the limit is 6%. If the down payment is over 25%, the seller can contribute up to 9%.
The exception to this is if the property is an investment property. In these cases, sellers can only contribute up to 2%, regardless of the down payment amount.
2. USDA Loans — Backed by the US Department of Agriculture
Sellers can contribute up to 6% of the buyer’s mortgage loan amount.
3. FHA Loans — Backed by the Federal Housing Administration
Sellers can contribute up to 6% for all FHA loans.
4. VA Loans — Backed by the Department of Veterans Affairs
The rules of VA loans state that the seller can contribute up to 4%. Seller concessions for these loans may also be able to include payments toward the buyer’s other debts and VA funding fees.
How Do I Decide Whether to Ask for Seller Concessions?
Seller concessions can be beneficial for both the buyer and the seller, depending on the situations surrounding the sale of the house. They can be especially attractive to buyers, but that doesn’t mean that you should always request them. Buyers should consider the house in question and discuss whether it’s a good idea to ask for seller concessions with their real estate agent.
Frequently Asked Questions
How do seller concessions benefit the buyer?
Seller concessions can lower the upfront costs that the buyer has to pay at the time of closing.
Should I always ask for seller concessions?
No, you should consider the current market conditions and discuss seller concessions with your real estate agent before deciding whether to request them.
Are seller concessions taxable income for the buyer?
No, they are considered sales expenses and are not considered taxable income.