A Guide to Seller Concessions
American Pacific Mortgage / August 31, 2022, at 8:00 AM
There’s always a lot of back and forth when you buy a home. It’s called the negotiation process, and it’s one of the reasons you need a great realtor. Potential buyers want to secure the best sale price possible, while a seller wants to achieve their list price - if not more. Some sellers also want to sell as quickly as possible.
These goals can motivate a seller into offering concessions. This is when the seller pays fees associated with closing costs or the home.
If a seller is offering concessions, they may have agreed to pay:
- Property taxes (through the end of the year)
- Title insurance
- Home inspection fees
- Recording fees
- Appraisal fees
- Attorney’s fees
- Loan origination fees
- Mortgage points
Concessions can also include the cost of repairs or improvements associated with the home.
Seller concessions are more common in a buyer’s market, which means there is more housing supply than demand from potential buyers. In a buyer’s market, a seller has to compete for buyers’ attention. If they want to hold firm on the sale price of their house, offering concessions is one way to do that.
On the flip side, sellers aren’t as likely to be offering concessions if the market favors them. In a seller’s market, there are more buyers than houses, which means the buyers have to compete to make their offers stand out. Nonetheless, some sellers have agreed to pay concessions even in this climate if it means saving the deal.
For example, say a seller has accepted an offer and all is moving along nicely…until the home inspection reveals a plumbing issue. Rather than knock some money off the sale price of the home, the seller might agree to pay for the plumber.
Even in a seller’s market, offering concessions is often worth it to the seller if it means they can ensure a fast closing and prevent the seller from relisting the home.
Like any deal, home buyers and sellers like to feel that they came out on top (or, at the very least, that they got the other side to bend a little). Though negotiations are a normal part of buying a home, negotiating concessions can be an art form.
That’s why you need a top-notch realtor who is used to navigating these deals on your side. If you don’t have one, DIVCAP/APM is always happy to recommend an agent.
Beyond that, determining whether it’s a buyer’s market or a seller’s market can help set your expectations for the likelihood of a seller offering concessions.
Then you want to prioritize your “asks.” Take notes during the walk-through, try to be present during the home inspection, and ask as many questions as you can when buying a home. You and your realtor can then develop a game plan that may involve asking the seller for a few concessions.
You also want to think through every scenario.
If the seller has agreed to pay what you’ve requested, you’re golden. But what if they want to split the difference? Maybe they’ll pony up for the title insurance and appraisal fees but draw the line at property taxes. What if they come back and hold firm, without offering any concessions?
You don’t want to get caught in a situation where the seller can quickly and easily move on to the next bidder. So think through your requests, hash them out with your realtor, and then be prepared to act on your next move based on what the seller says.
How Concessions Benefit Buyers
Not having to pay certain closing costs, fees, or repairs is an obvious benefit to a buyer, but let’s dig a little deeper.
When buying a home, some borrowers will opt to roll these fees and costs into their loan. If a seller has agreed to pay them, however, that’s less money they’ll need to borrow. A reduced loan amount is always a good thing!
The Risk to Buyers
There’s always an element of risk in negotiations. For potential buyers, asking a seller for concessions could kill the deal, particularly in a seller’s market.
How Concessions Benefit Sellers
Offering concessions can be a quick and easy way for sellers to keep their deal on track, achieve their desired sale price, and close on time.
Many sellers have agreed to pay concessions because they were up against the clock, having purchased a new home and needing to unload their current one. Some sellers will even choose to sweeten the pot by offering concessions upfront to attract more potential buyers.
In many cases, the cost of a concession is lower than a price reduction, and it often means a lower payment for the buyer, too.
Disadvantages to Sellers
All sellers want to achieve an optimal sale price for their home. While concessions may make it easier to achieve that price, these extra costs will nonetheless eat into their profits.
The negotiation process when buying a home may seem loosey-goosey, but it isn’t always so—especially when a home loan is involved. Concessions can be capped depending on the type of loan you obtain and even the size of your down payment.
For example, if you put less than 10% down with a conventional loan, seller concessions are capped at 3% of the total home loan amount. If you put more than 25% down, however, this number jumps to 9%. FHA loans and USDA loans are capped at 6%, while a VA loan allows concessions of up to 4% of the home loan amount (this number can be higher in certain circumstances).
When you think about concessions as a percentage of your total home loan amount, you can see that these seemingly little “gives” can really add up. The bottom line is that seller concessions are certainly a part of the home buying process, though every case is different.
For some buyers and sellers, the number of concessions, if any, may be dictated by whether it’s a buyer’s market or a seller’s market. For others, it may all come down to how badly one side wants to get the deal done.
Ready for more information on seller concessions and negotiations when buying a home? We’re always ready; give us a call anytime.