Navigating Seller Concessions: What You Need to Know and Your Best Alternatives

Low inventory, elevated home prices, and high interest rates are making it harder to unlock the door to homeownership. Hopeful buyers often discover that the key to this door is getting past the upfront costs required to buy a house. For many, the solution lies in “seller concessions”, which is sometimes even more attractive than giving an offer lower than the asking price.

But what exactly is a seller concession when buying a house, and how can it help clear the path on your homebuying journey?

In this article, I’ll provide clear insights and examples to help you decide if requesting seller concessions is the right strategy for your home purchase.

What is a Seller Concession in Real Estate?

Seller concessions or seller credit, is an arrangement where the seller agrees to pay a portion of the buyer’s closing costs. This helps reduce the amount of upfront cash needed at closing, making it more feasible for buyers to afford a home.

Closing costs can encompass various fees such as loan origination, title insurance, and appraisals. By covering these costs, the seller eases the financial strain on the buyer, potentially making their home more appealing and facilitating a quicker sale.

According to recent reports, over one-third of home sellers are offering seller assistance to buyers in response to current market conditions.

How Does a Seller Concession Work?

A seller concession involves the seller agreeing to cover a portion of the buyer’s closing costs, typically expressed as a percentage of the home’s purchase price, but it can also be a fixed amount. This agreement is reached during the negotiation phase of the home buying process. The seller's contribution is then applied to the closing costs, reducing the buyer's out-of-pocket expenses.

Examples of Closing Costs a Seller Can Cover with a Seller Concession

Here are some common closing costs that a seller can agree to cover as part of a seller concession:

• Buydown interest rate
• Discount points
• First month’s mortgage payment
• Loan origination fees
• Recording fees
• Appraisal fee
• Inspection fees

Understanding Seller Concessions Limits

It's important to be aware that lenders impose specific limits on the amount of seller assistance or concessions allowed in a transaction. These limits can vary based on the type of loan and the down payment percentage. The agreement for a seller concession must be included in the purchase contract and approved by the lender.

Example of a Seller Concession

Imagine you're buying a home priced at $1,000,000, and you have negotiated a 3% seller concession with the seller. This means the seller has agreed to contribute $30,000 toward your closing costs. Instead of needing to come up with $35,000 for closing costs on your own, you would now only need to provide $5,000.

This reduction in upfront costs can make a significant difference in your ability to afford the home, especially in markets where saving for both a down payment and closing costs can be a daunting challenge. This example shows how a seller concession can provide financial relief, making homeownership more accessible.

Limits of Seller Concessions

While seller concessions can be a valuable way to reduce upfront costs, it's important to be aware of the caps on these contributions, which vary depending on the loan type. These limits are in place to ensure that seller contributions don’t compromise the loan’s integrity or the home’s market value. Typically, the maximum amount a seller can contribute is based on the lesser of the sale price or the appraised value.

For example, if you offer $980,000 for a home that appraises at $950,000, and the seller concession limit is 3%, the seller can contribute up to 3% of the appraised value of $950,000. This would amount to $28,500 toward your closing costs.

The amount of seller concessions a seller can give in California depends on the type of loan and the buyer's down payment:

• Conventional loan: Sellers can contribute up to 3% of the purchase price if the buyer's down payment is less than 10%. If the down payment is between 10% and 25%, sellers can contribute up to 6%, and up to 9% if the down payment is more than 25%.
• FHA loan: Sellers can contribute up to 6% of the purchase price.
• VA loan: Sellers can contribute up to 4% of the sales price, plus reasonable loan costs.
• Investment property: Sellers can contribute up to 2%, regardless of the down payment.

Who Can Benefit Most from Seller Concessions?

Seller concessions are especially helpful for buyers who face challenges with upfront costs. This includes:

• First-Time Homebuyers: Often working with tight budgets, these buyers may find it difficult to save enough for both a down payment and closing costs.
• Buyers with Limited Cash Reserves: Those who can manage monthly mortgage payments but have minimal savings for initial expenses can benefit greatly from seller assistance.
• Buyers in High-Cost Markets: In areas with steep real estate prices, closing costs can be a significant hurdle. Seller concessions can help ease this financial burden.
• Buyers of Fixer-Uppers: Those planning to invest in home renovations may prefer to use their budget for improvements rather than covering high closing costs.

Why Would a Seller Agree to Concessions?

Sellers might agree to concessions for several reasons:

• To Speed Up the Sale: Offering a seller concession can make the property more attractive, particularly in competitive or slower markets.
• To Bridge the Negotiation Gap: If a buyer’s offer is slightly below the asking price but includes a request for seller concessions, the seller might view this compromise as a way to move forward with the sale.
• To Support Buyers: Sellers who are motivated by factors beyond just profit—such as helping a young family start their journey—might be more willing to provide financial assistance.

Pros and Cons of Seller Assists

For Buyers

Pros:

• Lowers the amount of cash required at closing.
• Makes homeownership more attainable.
• Frees up funds for a larger down payment or home renovations.

Cons:

• Might result in a higher purchase price, as sellers could increase the price to offset the cost of the concessions.
• Restrictions on seller concessions could limit your negotiating power.

For Sellers

Pros:

• Can accelerate the sale of the property.
• Attracts a broader range of potential buyers.
• Provides a competitive advantage in a busy market.

Cons:

• Decreases the net proceeds from the sale.
• May be less appealing in high-demand markets where there’s no need to offer incentives.

Tax Implications of Seller Concessions

Generally, accepting a seller concession won’t result in negative tax consequences for you as a buyer. In some cases, it could even make you eligible for a tax deduction. For instance, while most closing costs aren’t tax-deductible, you can deduct mortgage interest, including any discount points paid by the seller to reduce your interest rate.

It's always a good idea to consult with a tax professional when buying or selling a home to ensure you’re aware of all potential real estate-related tax deductions.

Alternatives to Seller Concessions

If a seller concession doesn’t seem feasible or isn’t the best fit for your situation, there are several other options to consider for managing the upfront costs of buying a home:

• Lender Credits: Similar to a seller concession, lender credits involve the lender covering part of your closing costs in exchange for a slightly higher interest rate on your loan.
• Gift Funds: Family members can often provide funds to cover some or all of your down payment and closing costs. Lenders typically require a gift letter to confirm that these funds are not a loan.
• Down Payment Assistance Programs: Many state and local governments offer programs to help first-time and low-income buyers with down payments and closing costs.
• Negotiating Closing Costs: You can try negotiating with your lender or other service providers to reduce or waive certain fees.

Are Seller Concessions Right for You?

Deciding whether to request a seller concession depends on several factors, including your financial situation, the current real estate market, and the seller’s flexibility. Consider the following:

• Your Available Cash: If covering closing costs is a challenge, a seller concession could provide significant relief.
• Market Conditions: In a buyer’s market, sellers may be more inclined to agree to a seller concession to close the deal.
• Property Appeal: If a property has been on the market for a while, the seller might be more open to offering a seller concession.

Negotiating a seller concession can be complex, so it’s important to fully understand how it impacts the deal for both you and the seller.

If you’re considering buying a home and wondering if a seller concession is the right strategy for you, I will be happy to guide you through the negotiation process and help you make the best decision for your unique situation.

If you have any questions, please, don't hesitate to contact me!

Maria Korpacheva, DRE 01978714, Beverly & Co. Luxury Properties

Contact: tel. 310-467-1474, [email protected]

Disclaimer: This marketing piece is not intended as a solicitation for properties currently in an exclusive agreement with another Broker. The above references an opinion and is for informational purposes only. It is not intended to be financial, legal, or tax advice. Consult the appropriate professionals for advice regarding your individual needs.