What Is a Seller Concession?
A seller concession is closing costs that the seller has agreed to pay to help assist the buyer. 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.
The Pros of a Seller Concession
Of course, the primary benefit of the seller concession is that it enables the buyer to pay significantly fewer fees at closing. This makes homes more affordable and also prevents the need for an exorbitant amount of funds up-front at closing. This is particularly beneficial to buyers purchasing homes at higher prices, as closing costs can be 3% to 5% of the total sale price, which can add up very quickly on expensive properties.
But buyers aren’t the only ones getting a good deal, as sellers can also benefit from offering a concession. A seller concession can help the home to sell faster and ensure an interested buyer doesn’t back out because they don’t have the out-of-pocket cash for closing costs. Sellers concessions can also be very appealing to buyers if you offer them upfront, making your home stand out.
Cons of a Seller Concession
Just as a seller concession can make sellers look more appealing to buyers, they can also, unfortunately, make buyers look less appealing to sellers. Of course, it makes sense that most sellers are looking for an offer that’s simple, straightforward, and will allow them to get the maximum return on investment for their home. In situations where the house doesn’t have many offers, this may not be a problem. However, if a property has several bids from different buyers, the seller is likely to choose a buyer that isn’t asking for a seller concession. If this is the case, as a buyer, it’s often better to simply put in a slightly lower bid but agree to cover closing costs out of pocket.
Negotiating a Seller Concession
If you know that you need to ask for a seller concession, how do you go about convincing the seller to help you without putting them off? This is where good negotiating comes in. Firstly, whether you’re in a buyer’s market or seller’s market is going to make a massive difference to a negotiation. It’s going to influence your ability to negotiate concessions Why? Because the seller will be significantly more motivated to offer concessions when their home has been on the market for a long time.
If you’re going to ask for a seller concession, try not to be demanding with other requests from the get-go. As mentioned previously, sellers usually look for a straightforward sale that doesn’t come with a lot of strings attached. If you want the deal to be less complicated, pick and choose the requests you make of the seller very carefully. For example, a seller will probably be put off if you’re requesting concessions on top of numerous repairs and are demanding other services. Remember, there is a give and take when negotiating salary concessions.
Seller Concession Limits
Even if you happen to luck out and have a generous seller who’s offering to pay all of your closing costs, they might be limited by the type of loan that you’ve been approved for. Overall the amount that a seller agrees to contribute can never exceed the total closing costs. Additionally, many mortgage companies have imposed rules regarding seller concessions as they could dramatically inflate the housing market if it was a free for all.
For this reason, conventional loans usually limit seller concessions to 3% if the down payment is less than 10%. If you put down a payment of 10% to 25%, the seller will be allowed to contribute up to 6%. For down payments greater than 25%, up to a 9% seller concession is allowed. FHA loans, however, have a strict contribution upper limit of 6%. USDA loans allow a seller to contribute 6% of the buyer’s loan amount, and VA loans have an upper contribution limit of 4%.
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.