What Are Seller Concessions And Why Do They Matter To Buyers?
Buying a house is a complex negotiation between buyers and sellers in which both parties are looking to maximize their profits or limit their costs in the sales process.
Knowing the market you’re hoping to buy a home in is important when it comes to deciding whether to ask the seller for concessions. In a seller’s market, it can be risky to even ask, but in a buyer’s market, sellers are more willing to make concessions.
What are seller concessions and how can you make them work for you? Let’s take a look.
What Are Seller Concessions Or Assists In Real Estate?
Seller concessions – also called seller assists or seller contributions – are closing costs that the seller pays to help the buyer by reducing the amount of cash they need to close. Seller concessions can be a way to lighten the buyer’s load in buyer’s markets but are very rarely granted in seller’s markets.
This is because sellers have more negotiating power in a seller’s market. Since there are more buyers looking for homes than there are houses for sale, they can afford to wait for an offer that doesn’t have contingencies attached. However, in a buyer’s market, sellers may be more willing accept an offer with contingencies because they’re less likely to receive a better offer.
Who Benefits From Seller Assists?
Seller concessions can be helpful for buyers who anticipate having trouble covering all of the costs associated with the home buying process, which can make them especially useful for first-time home buyers.
First-time home buyers who aren’t familiar with the home buying process may not realize that buying a house isn’t as simple as getting approved for a loan and having the cash for a down payment. There are many other costs that you’ll likely incur when closing on a home. Asking for seller concessions could lighten the financial burden of these costs and make it possible for you to get into the home you want. They’re available on any type of loan, including FHA, VA and USDA loans, though there may be special requirements for both parties in these cases.
Concessions can help the seller as well. If they’re trying to sell a home in a crowded market and aren’t having much luck, offering concessions can sweeten the deal and make their home more attractive to potential buyers.
How Do Seller Concessions Work?
Buyers might ask for concessions if they feel that the house is overpriced or if they think they’ll have trouble covering their closing costs when they make their initial offer. After they’ve submitted their offer, they might ask for concessions if a home inspector finds issues that are going to cost money to fix.
Remember, buying a home is a transaction where you’re able to negotiate a bit to try to get the best deal. Asking for seller concessions is a part of that negotiation process.
What Can A Seller Pay For?
Your closing costs will vary depending on your situation, but generally, you should expect to pay 3 – 6% of the home’s value in closing costs. These costs are separate from your down payment, so you’ll sometimes need to have a good chunk of money saved up just to get the keys to your new home, depending on the down payment requirements for your loan.
Since there are so many costs associated with buying a home, the seller might be willing to cover some of the fees associated with the processing and securing of your loan. Some of these fees include:
- Property taxes
- Attorney fees
- Origination fee
- Title insurance
- Discount points
- Fees for pulling credit
- Processing fees
- Inspection fees
- HOA fees
When Are Sellers Willing To Agree To Concessions?
There are a few scenarios where agreeing to concessions might make financial sense for a seller.
Maybe they want to complete the sale quickly because they’re also purchasing a house and don’t want the overlap of paying for two mortgages. In a seller’s market, they may have no choice. Or, perhaps the house has been on the market for a while and they aren’t getting any good offers. Whatever the reason, if the seller is eager to get rid of the house, they might be more open to helping you out with your closing costs.
Are There Limits To Seller Concessions?
Yes, there are, and they’re aimed at preventing inflation in the housing market. The major government authorities in the mortgage market – HUD, Fannie Mae and Freddie Mac – limit seller concessions in real estate contracts by loan type.
Conventional loans are loans issued by private mortgage lenders. Conventional mortgages are sold after origination to Fannie Mae or Freddie Mac if they conform to their rules.
The value of seller concessions in conforming loans are limited to a percentage of the purchase price of the home, based on the size of the buyer’s down payment:
Down Payment Amount And Seller Concession Limits For Conventional Loans
If your down payment is ...
Seller may contribute up to ...
Less than 10%
10 – 25%
Greater than 25%
If the property is an investment property, the limit on seller concessions is 2%, regardless of purchase price and the amount of the down payment.
Seller Concessions And Government-Backed Loans
If you’re purchasing a home with a government-backed mortgage, there are hard limits on the amount of seller concessions that are based on the purchase price, not the down payment amount.
Government-Backed Loans And Seller Concessions
If your mortgage is through ...
Seller may contribute up to ...
Advantages And Disadvantages Of Seller Concessions
Getting the seller to take care of some of your out-of-pocket costs probably sounds ideal. It can save you money and help you get into your new home without completely draining your savings.
However, that doesn’t mean it’s the right choice for every home purchase. You need to take a holistic look at your costs and take into account what the housing market is like in your area.
Are You In A Buyer’s Market Or A Seller’s Market?
In a buyer’s market where sellers have trouble selling houses due to high inventory or low demand, the buyer has all the power because a seller is more inclined to accept an offer if they aren’t sure they’ll get a better one.
However, in a seller’s market with high demand or low inventory, the seller holds all the cards. If you’re in a seller’s market, you risk having your offer declined if you try to attach concessions to it, because the seller might have other offers that pose less risk of falling through.
The Pros Of Asking For Seller Concessions
If market conditions are favorable, asking for seller concessions can be a great option. These are some of the benefits you can expect when you ask for concessions when making your offer:
- Your out-of-pocket closing costs could be lower.
- You could potentially make a higher offer while having more manageable closing costs.
- You may preserve more of your savings.
The Cons Of Asking For Seller Concessions
Asking for seller concessions isn’t without risks. Here are some possible disadvantages:
- You could end up paying more over the life of the loan with concessions than without.
- If you’re in a competitive market, you could risk having your offer declined by attaching concessions.
It can be tricky to determine whether it’s worth it to ask for seller concessions on your own. It’s best to work with an experienced real estate agent who knows the local market and who can help get you the best deal.
Are There Tax Consequences To Seller Concessions?
While every situation is different, in general, having a seller pay concessions won’t have any major tax implications, and may be eligible for a limited number of deductions. Keep in mind that it’s always best to speak with a tax advisor who can give you advice based on your individual circumstances before asking for concessions.
The IRS has rules dictating how homeowners and recent home buyers are taxed and what deductions they’re given. Most closing costs aren’t eligible for tax deductions, regardless of whether you or the seller pays for them. Currently, the only closing costs you can deduct are home mortgage interest and some property taxes.
The good news is that the mortgage interest tax deduction includes mortgage discount points (money that you pay at closing in exchange for a reduced interest rate), so if your seller offers concessions in the form of discount points, you’ll be able to deduct those points as mortgage interest.
A tax professional can go over these guidelines with you and help you navigate buying a home and taking on a mortgage, both of which come with their own sets of deductions.
The Bottom Line: In A Buyer’s Market, Seller Concessions Help Reduce Closing Costs
The concept of seller concessions can be confusing, especially if you’re a first-time home buyer. However, asking for those concessions in the right market conditions could save you thousands of dollars that you’d probably rather spend on other things. The best way to decide if asking for concessions is the right move is to work with a real estate agent that can give you well-informed advice.
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