What Are Seller Concessions and How Do They Work?

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Have you heard a real estate agent using the term “seller concessions” or “selling concessions” and wondered what it meant?

Buying a home can stretch your finances to the limit, with closing costs that could be as much as 5% of the purchase price. This can make purchasing the home you want very difficult, but there is a possible way to have the seller help you with these closing costs.

If the situation is right, sometimes the owner might be willing to help with these costs. These are seller concessions and could save you thousands when buying your new home.

A seller’s concession is also sometimes called a seller’s assist. In this scenario, the seller pays some or all of the buyer’s closing costs.

The amount the owner can contribute to closing costs will vary depending on the buyer’s loan type. If paying your closing costs is a concern, a seller concession could make buying your home more accessible.

From many years of experience as a Realtor, financial contributions from an owner can be a win-win for closing more real estate deals.
Over the years many buyer’s agents have asked me if my clients would be receptive to a credit vs a lower offer.
After explaining the concept to a seller there is usually very little resistance.

Let’s take a comprehensive look at dispensation and how you can use it to make buying your home less of a headache.

After reading, you will thoroughly understand a seller concession and how it works.

What Are Closing Costs?

Before explaining a seller giveback, it is essential to understand closing costs.

It is crucial to understand that both buyers and sellers have closing costs. Closing costs are expenses a buyer or seller will pay over and above the home’s purchase price.

Here is a list of some of the potential buyer’s closing costs:

Discount points
Origination fees
Title searches
Title insurance
Appraisal fees
Property survey
Deed recording fees
Credit report fees

Costs that continue to be charged over ownership include property taxes and homeowners insurance.

By law, lenders are required to present all the costs associated with purchasing a home to the buyer within at least three days of a mortgage loan application.

What is a Seller Concession?

Whether in real estate or some other aspect of life, a concession is when you concede or give something to another party. Real estate often involves negotiation during the home buying and selling process.

Over my thirty-eight years of selling real estate, many clients have asked me what seller concessions are. The meaning can be foreign to someone who does not sell real estate daily.

Sellers’ concessions are when the home owner agrees to pay some of your closing costs. This might be because you have asked them to help pay a particular fee, or they could pay a percentage of the closing costs.

Home buyers who receive an allowance are more likely to succeed in a buyer’s market. Buyers who do not receive an allowance are often discouraged from asking for any consideration in a seller’s market.

In hot real estate markets where bidding wars are prevalent, asking an owner to pay for the buyer’s closing costs would be a gross mistake. They will not need to pay any portion of a buyer’s closing costs.

Your offer would likely be declined when you ask for dispensation. When prices rise, homeowners are in the enviable position of being in the driver’s seat, often considering multiple bids.

In this circumstance, asking for assistance would not be considered favorably.

What is a Seller’s Assist?

A seller’s assist or seller’s concession is no different from a seller’s concession. These terms have the same meaning. A seller’s assist can be used interchangeably when describing a homeowner’s assistance in paying a buyer’s closing costs.

So, the next time you hear someone suggest a seller’s assistance, you will know they are talking about a concession.

What Fees Can They Pay For?

Your closing costs include many different fees, and the owner can contribute to some or all of the buyer’s closing costs.

Inspection fees could include the cost of the home inspection or other types if required.
Title insurance is coverage to protect the lender should the ownership of the property later become disputed. Buyers can also have their title insurance policy. These are known as title fees.
Property taxes will be due at closing and must cover the entire year.
Loan origination fees are charges that cover the costs of arranging the loan.
Appraisal costs: the lender may require an appraiser to assess the property’s value to check that they aren’t lending more than the home is worth.
Attorney fees: depending on your state, a real estate attorney might be needed to check the paperwork.
Recording fees: the local government might have fees to register the change of ownership.
Mortgage discount points are a fee to reduce your interest rate on the home loan.

Both loan origination fees and mortgage points would be considered financing concessions.

The loan program a buyer chooses could affect the costs involved.

When you apply for a loan, you will be given an idea of your closing costs. The lender must give you a loan estimate showing how much money you must spend on closing day.

Your real estate agent can assist you in deciding which fees you would like the owner to help cover.

The Advantages of Offering a Concession

The benefits of consideration to buyers are clear. It allows you to save money on your closing costs. When you buy a home, you will need thousands to pay closing costs and your down payment, so if the seller is willing to offer some assistance, it can make a big difference.

The advantage to the seller for providing an indulgence is that it can ensure their home gets sold. The longer the property has been on the market, the more eager the owner could be to help a buyer close quickly.

If a buyer’s market and property values are declining, paying a buyer’s closing costs can go a long way to completing a sale. The amount an owner provides is always negotiable.

The Disadvantages of Providing a Concession

As a buyer, asking for an indulgence from the seller can have some negatives. The owner might not be willing to pay some of the buyer’s fees or deal with this request. If that is the case, they might prefer to find another offer.

When an owner has multiple offers, the buyer asking for help will likely lose the home. They might reject offers with accommodation attached very quickly, making it a better idea for the buyer to pay all the closing costs and offer a lower price for the home instead.

Buyers need to gauge the current market. An experienced real estate agent can be looked to for proper guidance. When homes are in high demand, it is usually best to avoid asking for closing cost credits.

Negotiating Seller Credits

If you decide to ask for one, it is a good idea, but you still need to persuade the seller to agree.

Whether you convince the owner depends on the local market conditions and the negotiation process.

Favorable market conditions for sellers will make receiving assistance more difficult. But if the home and others in the area have been stuck on the market for long, the seller will be more eager to agree to things they wouldn’t otherwise.

If the owner doesn’t see any other prospects of finding a buyer, you will be in the driving seat to negotiate some compensation.

If things aren’t clear-cut in your favor, not going too far with your demands will be more likely to succeed.

Sellers are more likely to favor offers that are less conditional and complicated.

So, if you want to request they deal with some repairs to the home, asking for givebacks might be a more complex negotiation.

If you’d like some concessions but aren’t sure what or how much to ask for, your real estate agent should be able to assist you.

Your real estate agent will have a good understanding of the market and be able to find other examples where owners offered assistance to other buyers.

With this information, you might more easily persuade a seller if they know others in the area have been giving concessions to buyers.

Your real estate agent should be able to advise the best approach in your market.

Whether it is better to reduce your offer or ask the owner to pay closing costs depends on the local conditions.

Understanding whether it is a buyer’s or seller’s market is essential.

Assistance Can Be a Win-Win

A seller concession does not necessarily have to be money from an owner’s pocket. They could assist the buyer by paying for a portion of their closing costs, which could be added back to the home price.

For example, if the total closing costs are $8000, that same amount could be tacked onto the buyer’s offer to purchase the house.

So if the home is listed for $500,000 and the buyer is willing to pay that amount, they could agree to pay $508,000 while asking for an $8000 closing cost credit. This is an excellent way of making it a win-win scenario for both parties.

By raising the home’s sale price, the owner will still net the same amount while the buyer gets their upfront costs paid for by the owner. The home’s purchase price can be manipulated to work for both parties.

Another name for the buyer’s costs paid for by the seller is interested party contributions. For guidance on what is allowed, visit the Fannie Mae website.

Examples of a Seller Providing a Buyer Assistance

Seller concessions do not always have to be monetary. Compromising can be other things that may hold value for a buyer.

Here are a few examples:

The seller offers to pay for the buyer’s home warranty purchase.
A seller leaves the deck furniture for the buyer.
The seller leaves the washer and dryer they initially did not include in the sale.
A buyer asks for the pool table to be left with the home.

What Are Contribution Limits For Sellers

The buyer’s loan program dictates the amount of seller concessions. Even if you want them to, or the owner is willing, they cannot contribute all your closing costs. Different contributions are allowed depending on the type of home loan you are applying for.

Sellers aren’t allowed to give concessions that are more than the entire closing costs. So, if you buy a $200,000 home, you could get $12,000 from the seller, but if your closing costs are half that, you are only allowed $6,000.

Limiting contributions prevents market inflation. HUD and Fannie Mae set the rules to avoid adding more upward pressure to the housing market.

What could otherwise happen is that homeowners give more significant contributions to buyers to make it easier for them to buy in exchange for a higher purchase price. While this could help many people purchase, it will increase house prices.

Since previous sales data is used to value homes, inflation will increase. This will also increase rental prices, so the whole market situation could spiral out of control without these restrictions.

Contribution Limits By Mortgage Types

There are seller concession contribution limits in a real estate transaction. The limit will vary depending on the type of home loan you are using.

Whichever is lower between the sale price and the appraised value will set the contribution for closing costs.

If you were to offer $210,000 for a home and the appraiser’s report says it is worth $200,000, the seller will be able to contribute based on the lower amount in most cases. This would be $6,000 for a 3% limit and $12,000 for 6%.

Of course, contributions can’t be higher than the closing cost amount, whatever the percentage allowed.

Concessions on Conventional Loans

Contribution limits for conventional loans change depending on the buyer’s down payment amount, apart from when someone buys an investment property.

Investors can only accept a dispensation of 2% regardless of the down payment.

The greater the down payment the buyer makes, the more they can contribute towards closing costs.

With a down payment below 10%, the owner is limited to 3%.

If you put down between 10 and 25%, the seller can give you as much as 6%. Down payments above 25% allow sellers to offer contributions up to 9%.

So, the maximum seller concessions for conventional loans depend on the down payment.

So, to summarize what sellers can do:

With a down payment of less than 10%, a seller can contribute 3%.
With a down payment between 10 – 25%, a seller can contribute 6%.
With a down payment of more than 25%, a seller can contribute 9%.
If you’re buying an investment property, sellers can contribute no more than 2%, regardless of the down payment.

Maximum Contributions For FHA Loans

The amount of assistance works differently with an FHA loan. The seller contribution has a maximum amount of 6%, regardless of the buyer’s down payment or other factors.

With FHA loans, borrowers are required to pay private mortgage insurance. This cost is paid over the life of the loan. An owner can contribute to a buyer’s upfront mortgage insurance premium.

Before making an offer, the maximum consideration for FHA should be considered.

Maximum Contributions For VA Loans

With VA loans, seller contributions are limited to 4%. However, these contributions can go towards other things than the standard closing costs.

The seller can pay the VA loan’s funding fees, debts, and buyer’s judgments. If you are a veteran using a VA home loan, it is essential to understand the VA funding fee. Look at the excellent resource that explains what you need to know.

Given that VA mortgages often have no down payment loans, it is not unusual for a buyer to ask for financial help. Offers are often structured so that money is returned to the buyer to pay closing costs.

Maximum Contributions For USDA Loans

The USDA loan restrictions are slightly different, with a 6% contribution limit. Still, the mortgage lender uses the loan amount instead of the sales price or the appraiser’s valuation.

Six percent should be more than adequate for accommodating a buyer with monetary assistance.

What About a Mortgage Rate Buydown?

One of the most significant factors home buyers consider when purchasing a home is the mortgage rates. A lower interest rate can significantly decrease monthly mortgage payments. It can also save buyers thousands of dollars over the life of their loan.

In a competitive real estate market, sellers sometimes offer to buy down a home buyer’s mortgage rate to attract potential buyers. This would be a different form of a seller’s concession.

Buying down a mortgage rate involves the seller paying a certain amount of money upfront to the lender to reduce the buyer’s interest rate. This can be attractive for buyers, lowering their monthly mortgage payments and saving them significant money.

Sellers can make their property more appealing and stand out by offering to buy down the loan rate.

A rate buydown can help sellers command a higher selling price for their property. Buyers may be willing to pay more, knowing they will have lower monthly payments.

Overall, it can be a win-win situation for both sellers and buyers. Buyers can save money on mortgage payments, while sellers can differentiate their property and potentially secure a higher selling price.

It’s crucial for both parties to thoroughly evaluate the financial implications and terms of the buydown before proceeding. Still, it can be a compelling incentive that benefits all involved.

Many mortgage lenders will market this type of assistance to help with sales. Ask your loan officer to guide you on the best way to proceed.

The Home Inspection Could Trigger a Seller’s Assistance

A renegotiation could often take place during the home inspection. If problems are discovered that need significant repairs during the inspection period, it is certainly possible that a seller concession is given.

However, buyers need to be reasonable when making home inspection requests. Being unreasonable with inspection requests can lead to sales falling through.

When in strong seller’s markets, making significant requests should be avoided.

Concessions For Repairs

A seller’s home repairs or improvements allowance is typical when the real estate market favors buyers. Experienced real estate agents often recommend their seller clients give a concession rather than make repairs.

By providing the potential buyer with repair credits, you don’t have to complete repair work to their satisfaction.

Sellers are much better off determining a dollar amount and either deducting that amount from the purchase price or offering a concession.

The average seller credit for repairs will go up during buyer's markets and down during seller's markets.Click To Tweet

Can They Be Used For a Down Payment?

No. A seller concession cannot be used to assist a home buyer with their down payment.

Seller Concession vs. Price Reduction

A seller concession and a price reduction can help a buyer complete a sale. From a seller’s perspective, neither choice should make a difference. It is the bottom line that matters.

Some buyers prefer monetary consideration over a price reduction or vice versa.

Are Concessions Tax Deductible?

Yes. A concession is a selling expense that can be deducted from your taxes.

How to Write an Offer With a Seller Contributing?

Writing an offer with seller concessions is simple. The requested help must be written as an amount in the body of the offer.

You can also use a concession supplement if you prefer. The requested seller’s assistance should be apparent.

Is Asking For One a Good Idea?

Every seller should care about their bottom line, not the home’s sale price.

Over my thirty-seven years in selling real estate, there have been times when a seller has become disenchanted because a buyer has asked for a closing cost credit. The home’s sale price is far less important than what a seller nets from the sale.

For example, if you sell a $400,000 home and the buyer offers $395,000 with a $5000 seller’s concession, this is no different than a buyer offering $390,000.

Depending on the real estate market, a $390,000 net to the seller may be significant. Sellers need to focus on their bottom line and not get angry when a buyer asks for consideration.

If the market value is X dollars, it doesn’t matter how it is achieved. What’s important is completing the home’s sale for the most money.

Interesting Statistics to Know

1. On average, sellers offer a concession of 3.2% of the home’s sale price.
2. Approximately 78% of homeowners will provide seller concessions to potential buyers.
3. Homes that offer selling concessions sell 14% faster than those that do not.
4. The most common form of consideration covers 2.1% of the buyer’s closing costs.
5. In competitive markets, owners who offer seller concessions receive 32% more offers on their houses than those who don’t.
6. Seller reciprocity has been found to increase the likelihood of a successful sale by 73%.
7. Buyers who receive homeowner concessions typically pay an average of $8,500 less on their purchase.
8. Houses between $250,000 and $400,000 most likely include givebacks.
9. The frequency of seller concessions increases by 7% in a buyer’s market compared to a seller’s market.
10. Properties that offer dispensation tend to sell for 98% of their listing price, while others typically sell for 95%.

FAQs

How do seller concessions differ from closing cost credits?

Seller concessions and closing cost credits are commonly used in real estate transactions. While they may sound similar, there is a subtle difference between them.

Seller concessions refer to when the seller agrees to contribute a certain amount of money towards the buyer’s closing costs or other expenses related to the property purchase.

On the other hand, closing cost credits are a form of financial assistance the seller provides to cover specific closing costs such as appraisal fees, title insurance, or attorney fees.

While both involve financial assistance from the owner, concessions have a broader scope. They can cover various expenses, whereas closing cost credits are designated explicitly for closing-related costs.

What factors can affect the amount of seller concessions offered?

Several factors come into play when determining the amount of assistance offered. First, market conditions play a significant role. If the real estate market is experiencing high demand and low inventory, owners may be less inclined to offer cash as they have more negotiation leverage.

Conversely, owners may be more willing to offer concessions to attract potential homebuyers in a buyer’s market with abundant properties for sale.

Additionally, the property’s condition can impact the amount of money offered. If the residence requires significant repairs or updates, sellers may be more open to providing concessions to offset these costs for potential buyers.

Lastly, the seller’s motivation can also influence the compensation offered.

What is the difference between a seller’s assistance and a price reduction?

Seller concessions and price reductions are negotiation strategies used in real estate transactions but differ in their approach. Concessions refer to the seller agreeing to pay for certain costs or expenses on behalf of the homebuyer, such as closing costs, repairs, or upgrades.

This can help alleviate some buyers’ financial burdens and make home purchases more affordable. On the other hand, a price reduction involves lowering the actual purchase price of the property. This can be done for various reasons, such as market conditions or to attract more potential buyers.

While both strategies aim to benefit the buyer, an incentive focuses on specific expenses, while a price reduction directly affects the overall cost of the property.

Are there any potential drawbacks or risks with seller concessions?

While seller concessions can benefit buyers, there are potential drawbacks and risks. One possible drawback is that a seller concession may lead to a higher purchase price for the property.

Property owners may increase their asking price to compensate for the concessions they provide, ultimately resulting in a higher overall cost for the buyer.

Additionally, giving back funds could indicate underlying issues with the property that the owner is trying to offset. Buyers must inspect the property thoroughly. Conducting due diligence ensures they are not unknowingly taking on any hidden problems or liabilities.

Lastly, seller concessions may also impact the property’s appraisal value, potentially affecting the buyer’s ability to secure financing or leading to trouble during the closing process.

Final Thoughts

Sellers’ concessions hold the promise of making buying a home more affordable. If the owner agrees to help the buyer with closing costs, it can make the home easier to sell. A seller’s assistance can be highly beneficial to some buyers.

Since there are some negatives to asking the seller for concessions, you will need advice from your real estate agent. If the conditions are favorable, you could negotiate to reduce closing costs.

You will stay within the rules if you don’t receive more money than your loan type allows or more than the closing costs.

Hopefully, you now have a much better understanding of how sellers’ concessions work. Before you know it, you’ll sign the final paperwork at the closing table.

About the Author: The above Real Estate information on the definition of seller concessions was provided by Bill Gassett, a Nationally recognized leader in his field. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.

Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 37+ years.

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