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The dynamics between a home buyer and seller can be pretty tricky. From the sale price to the closing date, there are many factors that the two of you will probably negotiate. Another piece of the real estate puzzle you may also discuss is a seller concession. Not sure what that means? Don’t worry, we’ve got you covered.
What is a seller concession?
A “seller concession” or “seller contribution” is a credit that the seller gives the buyer toward their closing costs (i.e., the upfront fees associated with a real estate transaction). A home buyer might request a seller concession in their offer if they think the house is overpriced or if they want help covering the upfront costs of purchasing a home. Buyers may also request a contribution later in the process if the home inspection flags any necessary repairs.
How does a seller concession work?
There are two different ways that a seller concession can work. The first scenario is pretty straightforward – a seller concession will lower the overall purchase price of the property. As a result, the seller will take less profit, and the buyer will get a better deal. This type of concession tends to be more common in buyer’s markets; because there’s less demand for houses, buyers have more negotiating power.
Ex: Let’s say the home’s list price is $100k. The home inspection found that the roof needs major repairs, so the buyer requests a $5k seller concession to cover the cost. If the seller accepts, the final purchase price will be $95k.
The second way of getting a concession is a bit more complicated. In this scenario, a seller concession will increase the purchase price of the home. However, the home seller will use that additional profit to help cover the buyer’s closing costs. So what’s the point then? This adjustment helps the buyer lower their upfront closing costs by allowing them to roll them into their mortgage.
Ex: Again, let’s say the home’s list price is $100k. The buyer needs 5% to help cover their closing costs, so they request a $5k seller concession. If the seller agrees, the final purchase price will be $105k, but the seller will pay the buyer’s closing costs with the extra $5k they receive from the buyer’s mortgage lender.
Who can get a seller concession?
Buyers can receive a seller concession regardless of their home loan type, whether it’s a conventional loan or a government-backed loan (i.e., FHA, VA, or USDA loans.) However, there may be rules around the maximum amount of seller contributions depending on the type of mortgage loan, down payment, and property type. For example, if a buyer has an FHA loan, they typically can’t get a seller concession above 6% of a home’s sale price. In many cases, the seller contributions also can’t exceed the buyer’s total closing costs.
If a buyer is looking to get a seller concession to roll their closing costs into their mortgage, the home appraisal must support the “adjusted” purchase price. That’s because the buyer’s mortgage lender will not lend them more than the home is worth.
Is a seller concession worth it?
It can be tricky to determine whether or not a seller concession makes sense, especially for first-time home buyers and sellers, so consult with an experienced real estate agent who knows the local housing market.
If you’re a seller, accepting a buyer’s request for a seller concession may help your home sell faster if you need to sell so you can buy a new home or if your home has been on the market for a while. However, seller contributions can be a hidden cost that takes away from your potential profit, not to mention the fact that the negotiation process could also derail your timeline. And if you accept a seller concession, there’s always a risk that the sale will fall through later on because of appraisal problems.
If you’re a buyer, it might seem like there’s no downside to asking for a seller concession – you’ll either reduce the cost of buying a home or have more manageable closing costs, right? By requesting a concession, you could actually end up losing out on your dream home. That’s because most sellers prefer potential buyers who are willing to bring more money and certainty to the table. And if you’re thinking about using a concession to help you roll your closing costs into your mortgage, you could end up paying significantly more in interest over the life of the loan.
So is there a way to get the benefits of a seller concession without the downsides? If you’re looking to move on a specific timeline, whether that’s because you have found your next home or need to relocate for work, Orchard can help you avoid giving concessions just to get a quick sale. With our Move First service, you’ll have the freedom to shop without your home sale holding you back.