What Are Seller Concessions?
The dance between home buyer and seller is a tricky one. While it might seem like a match made in heaven – one person wants to buy a house, the other has a house to sell – it’s a complex negotiation 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.
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 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 are 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 Contributions 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. Later in the process, 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.
Buying a home is a transaction where you’re able to negotiate 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. Add that to your down payment, and that’s a hefty chunk of change.
Because 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
There are limits to the amount a seller can contribute. These limits will depend on a few different factors, including the type of loan you’re getting, how much you’re putting down and whether you’re purchasing a primary residence, second home or investment property.
For example, on a conventional loan for a primary residence where you’re putting 10% down, the maximum contribution amount is 6% of the sale price.
If you plan on asking for seller concessions, be sure to check with your lender and find out the maximum contribution amount you can receive.
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 having 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 and Fannie Mae/Freddie Mac, limit seller concessions in sales contracts by mortgage type.
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 concessions may equal 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 purchase price, not the down payment amount.
Advantages And Disadvantages Of Seller Assists
Sounds great, right? Get the seller to take care of some of your out-of-pocket costs, save yourself some cash and sail smoothly into your new home.
Not so fast. Be sure 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 could risk having your offer declined if you try to attach any concessions to it, because they might have other, cleaner offers.
Additionally, while a seller concession can lower your upfront costs, if you’re using it to offset a higher purchase price, you’re essentially rolling your costs into your loan.
To recap, here are some advantages to asking for seller concessions:
- Your out-of-pocket closing costs could be lower.
- You could potentially make a higher offer while having more manageable closing costs.
And 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, so it’s helpful 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 Assists?
While every situation is different (and we advise discussing any questions you have with a tax advisor who can give you advice based on your individual circumstances), in general, having a seller pay concessions won’t have any major tax implications, and may be eligible for a limited number of deductions.
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 certain real estate taxes, according to the IRS.
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 mortgage discount points, you’ll be able to deduct those points.
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
With most of the country experiencing a prolonged seller’s market, you’re forgiven for not being familiar with seller concessions, but if the market cools, you should keep the idea of asking for seller help to meet the buyer’s closing costs in your back pocket. It could save you thousands of dollars that you’d really rather spend on furnishing your new home.