Seller Concessions: Comprehensive Guide

By PropertyClub Team
Jul 21st 2024
Seller concessions are incentives or contributions that a seller offers to a buyer to help cover the buyer's closing costs, reduce the buyer’s out-of-pocket expenses, or make the overall transaction more appealing. These concessions can be a strategic tool in real estate transactions, especially in buyer’s markets or when the seller wants to expedite the sale. Here's a detailed look at what seller concessions are, how they work, and their pros and cons.

hash-markWhat Is a Seller Concession?

Seller concessions are financial incentives that sellers offer to buyers to help cover specific costs associated with purchasing a home. Sellers may agree to contribute to cover specific closing costs or pay a percentage of the total.

Seller concessions will usually cover closing costs like transfer taxes, mansion taxes, title insurance, loan origination fees, recording fees, appraisal fees, and inspection fees. But how do you determine whether you’ll need help from the seller?

As a buyer, upon application of the loan, the lender will provide you with a loan estimate which will detail the estimated closing costs and enable you to decide what costs you need to be covered by a seller concession.

hash-markWhat Can Seller Concessions Cover?

1. Closing Costs

Closing costs can range from 2% to 5% of the purchase price and may include fees for loan origination, appraisal, title insurance, and more. Seller concessions can help cover these expenses.

2. Prepaid Expenses

These include upfront payments for property taxes, homeowners insurance, and mortgage interest. Seller concessions can help cover these costs as well.

3. Repair Costs

If a home inspection reveals necessary repairs, the seller may offer concessions to cover the cost of those repairs rather than completing them before the sale. These are also known as a seller credit for repairs

4. Discount Points

Sellers can offer to pay points on the buyer's mortgage, which can lower the interest rate and monthly mortgage payments.

5. Other Incentives

Sellers might also offer to pay for a home warranty, cover homeowners association (HOA) fees, or contribute to the buyer’s moving expenses.

hash-markSeller Concession Examples

  • Covering Closing Costs: A seller agrees to pay $5,000 towards the buyer’s closing costs.
  • Repair Allowance: Instead of fixing a leaky roof, the seller provides $3,000 for the buyer to use toward repairs.
  • Mortgage Points: The seller contributes $2,000 to buy down the buyer’s mortgage interest rate.

hash-markSeller Concessions Pros

Pros for Buyers

  1. Reduced Upfront Costs: Seller concessions can significantly reduce the amount of cash a buyer needs to close the transaction.
  2. Increased Affordability: By lowering closing costs or interest rates, concessions can make a home more affordable for the buyer.
  3. Easier Budget Management: Buyers can allocate more of their savings toward the down payment or other expenses.

Pros for Sellers

  1. Faster Sales: Offering concessions can make a property more attractive, potentially leading to a quicker sale.
  2. Competitive Edge: In a competitive market, seller concessions can differentiate a listing from others, attracting more buyers.
  3. Higher Selling Price: Sellers may be able to negotiate a higher selling price if they offer concessions, balancing out the financial impact.

hash-markSeller Concessions Cons

Cons for Buyers

  1. Higher Home Price: Sellers might raise the home’s price to offset the concessions, which can result in a higher mortgage amount for the buyer.
  2. Potential Loan Approval Issues: Lenders have limits on seller concessions, and exceeding these limits can complicate loan approval.

Cons for Sellers

  1. Reduced Net Proceeds: Offering concessions reduces the seller’s net proceeds from the sale.
  2. Negotiation Complexity: Concessions add another layer to the negotiation process, which can complicate and prolong the transaction.

hash-markNegotiating a Seller Concession

Seller concessions are typically negotiated during the offer and counteroffer process. The buyer requests specific concessions, and the seller can agree, negotiate the amount, or reject the request. The agreed-upon concessions must be documented in the purchase agreement and approved by the lender. Some lenders may also limit the amount of seller concessions a buyer can receive. 

Seller Concessions Limits

There are limits to the amount of seller concessions allowed, depending on the type of loan. For example:

  • Conventional Loans: Typically, seller concessions can range from 3% to 9% of the home’s purchase price, depending on the down payment amount.
  • FHA Loans: Up to 6% of the purchase price can be covered by seller concessions.
  • VA Loans: Allow up to 4% of the purchase price in seller concessions. 

So, seller concessions can help make a home more affordable for a buyer and help a seller quickly and efficiently close a deal. In these circumstances, it’s a win-win situation, and both the buyer and seller can benefit. If you’re unsure whether you should ask for a seller concession or how to best negotiate, it’s advisable to confer with a real estate agent. A realtor will help you determine whether the market is right to request a seller concession or whether you’re better off trying to cover closing costs yourself.

hash-markSeller Concessions Bottom Line

Seller concessions can be a powerful tool in real estate transactions, offering benefits to both buyers and sellers. Buyers can reduce their upfront costs, while sellers can make their property more appealing and potentially expedite the sale. However, both parties should be aware of the limits and implications of concessions, including how they impact loan approval and the overall negotiation process. Careful consideration and clear communication are key to successfully leveraging seller concessions.