“Seller concession” is a term real estate agents use when the seller pays part of the buyer’s closing costs. Seller concession can be beneficial to both buyers and sellers.
If the buyer is short on funds to purchase a home, they might be eligible to have the seller pay for closing costs out of the proceeds of the sale.
The seller isn’t just paying the buyers closing costs, though. The purchase price is usually set higher so the buyer is actually financing the cost of the seller concession.
When the seller receives an offer with seller concession, they are considering the net offer (purchase price minus seller concession).
In it’s simplest comparison: Both buyer 1 and buyer 2 submit offers at the same time. Buyer 1 offers $200,000 and will pay for their own closing costs. Buyer 2 offers $205,000 with a $5,000 seller concession. You may think that the Buyer 2 offer is higher, but the seller is looking at the net offers and other factors so consider which is better.
Even when you have the same net offer, offers without seller concession are considered stronger (Option 1). The buyer is showing they have larger savings and will more likely get the final mortgage approval. Going with offer 2 is riskier.
There’s a limit to how much seller concession a buyer can get depending on the mortgage type and down payment. Lenders will limit seller concession generally between 2-6% of the purchase price.
In a buyer’s market, buyers can ask for more seller concession upfront because they don’t have a lot of competition. There are too many homes on the market and not enough buyers.
A seller’s market is much more competitive between buyers. Many homes for sale end up with multiple offers and a highest and best scenario. There aren’t enough homes on the market for the amount of buyers. You’ll want to submit your truly highest and best offer to win the bid.
Advantages of Seller Concessions
Offering seller concession opens the market up to more buyers looking at their home. Between school loans and everyday bills, buyers tend not to have a large savings. The buyer pool will be higher for the seller, which means more competition which leads to a higher sale price and a faster sale.
A faster sale will limit the sellers carrying costs. If a seller has already moved out and the home is sitting vacant, property taxes, electric and other bills add up quickly. It may not be worth it to the seller to pass on an offer because they may be able to get $5,000 more later. The risk doesn’t outway the benefit.
The buyer benefit is keeping opening up more funds for other costs associated with buying a home. Taking the pressure off of buyers considering if they have enough savings will help the buyer move forward with a sale.
If buyers need additional funds for things like down payments, furniture, moving costs, asking for seller concession can be advantageous. A mortgage is considered one of the cheapest ways to buy money. Instead of paying 15-25% interest on a credit card, it’s cheaper to pay 3-6% interest with a mortgage.
Both buyers and sellers can utilize seller concession when a home inspection uncovers more than expected.
Sellers can utilize seller concession to their benefit after a home inspection. Sometimes sellers don’t have the time, money, or energy to make repairs requested by the buyer. Offering seller concession instead can help keep deals together. This keeps money in the buyers pocket to do repairs after closing.
On the flip side, maybe buyers want to have full control over repairs. The seller can obtain quotes and credit the buyer market price for the repair to be completed later.
Potential Downfalls of Seller Concession
The buyer might not be in the best position to get the final mortgage approval if they’re asking for a large seller concession amount upfront. If they raise their debt by just a little, that could ruin their chances. These reasons could discourage the seller from accepting an offer.
If a seller does accept the offer, the appraisal can be another issue. You might be thinking, what’s the big deal if the seller accepts $5,000 over asking to cover the buyers closing costs. Well, this doesn’t mean the house is worth $5,000 over asking. The mortgage lender will still need an appraisal that values the property at the mortgaged amount or above.
If the appraiser values the home at $205,000 and the purchase price is $205,000 with a $5,000 seller concession, that means the seller is sort of selling the home $5,000 under market value. One example as to why the seller would agree to this that it’s the only option for the home to be sold in a time frame the seller needs.
Seller concessions raise the cost of other fees in the transaction. Seller’s pay transfer tax on the total sale price. Real estate agent’s fee is calculated on the total sale price. Buyers pay for title insurance on the full purchase price. The fees increase slightly on both sides. Again, keep in mind the benefits can outway the downfalls.
In a buyer’s market, when there are too many homes on the market and not enough buyers, buyers can ask for more seller concession upfront.
A seller’s market, when there are too many buyers and not enough homes for sale, is much more competitive between buyers. Many homes for sale end up with multiple offers and a highest and best scenario. There aren’t enough homes on the market for the amount of buyers. You’ll want to submit your truly highest and best offer to win the bid.
If you need seller concession to buy a home, don’t be discouraged. Many first-time homebuyers utilize this and buy homes every day whether in a buyers or sellers market.
If you’re a seller considering accepting offers with seller concession, know that you’re among many in both markets. Motivation for selling is a huge factor in your acceptance. A higher price but a later settlement date may not be as beneficial as you think. That higher price offer might not come.
Contact one of Sail Lake Realty’s agents to help guide you with the best options available to you.
Don’t forget to check out homes for sale in Hammonton, Williamstown, Egg Harbor Township and the surrounding South Jersey area!