What Are Seller Concessions? Seller Concessions Explained
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Intro To Seller Concessions
What Are Seller Concessions? | You MUST Know This!
Wondering what Seller Concessions actually are?
This is a question that most of my clients have asked me about and it is something they have absolutely no clue about. But what are seller concessions actually? Do they affect the real estate market? Can the buyer and seller really benefit from it by utilizing seller concession?
Seller concessions are a concession where the seller can provide the buyer with a monetary concession. It helps the buyer lighten their load in terms of their expenditure regarding their closing costs. It can also be applied to buy down the interest rate to get the buyer a lower interest rate to make their purchase much more affordable. It is a very effective tool for the seller to give the buyer and the buyer to purchase from the seller.
This requires a bit of a discussion so let’s go over it.
You can watch the video above to learn more about seller concessions.
What Are Seller Concessions
As our market has started to change, we’re now seeing sellers provide seller concessions. So I’m going to go over what they are and how they can be utilized and benefited both from a buyer’s perspective and a seller’s perspective.
But over the last couple of years with the hot market seller concessions were not given by the sellers just because they didn’t have to. But now as things are starting to change in order to make it more attractive for a buyer, we’re starting to see seller concessions come back. So there’s a benefit to the buyer and it’s also a benefit to the seller in order to help them get their property sold. So I’m going to dive on into seller concessions and give you all the benefits behind why you would want to utilize them if you’re a seller.
And also write them in the contract if you’re a buyer. Well, let’s dive into what are seller concessions.
Seller concessions are a concession that the seller can give the buyer, a monetary concession that the seller can give the buyer to help the buyer lighten their load in terms of money that they have to come out of pocket when it comes to their closing cost. And it can also be applied to buy down the interest rate to get the buyer a lower interest rate to make their payment that much more affordable and a very effective tool for the seller to give the buyer and also for the buyer to ask the seller.
So there are benefits for both, which I’m going to go over, but again, seller concessions are concessions that the seller gives the buyer in order to help them with less money out of pocket in order to close on the home and or buy down the rate.
How Does A Home Buyer Get Seller Concessions?
How does a buyer get seller concessions?
Well, it’s negotiated in the contract. So when a buyer fills out the contract and submits it to the seller, it’s within the contract and it’s something that’s negotiated and also can be countered upon.
On the Arizona purchase contract on page three, it’s 2J lines 100 to 102.
It says “Seller concessions. In addition to the other cost, the seller has agreed to pay herein, seller will credit buyer either a percentage that you can put in or an actual dollar amount.
The seller concessions may be used for the buyer’s fees, cost, charge, or expenditures to extend allowed by the buyer’s lender.” So you always have to check with the lender because there are certain things that are going to be applied to. And then there are some things that you cannot utilize that money for.
Check With Your Lender About Seller Concessions
And the other thing that you want to check with your lender, it’s very important because if you ask for a bigger amount, you want to make sure that you can utilize 100% of the seller concessions.
I’ve seen times when a buyer asks for a sizable seller concession and there are not enough fees in order to utilize all the seller concessions. So then you would have to do an addendum and do a price reduction for the difference, which can cause a little bit more paperwork.
So it’s best to talk to the lender upfront so you can get everything correct when you submit the offer to the seller when you’re negotiating seller concessions.
Who Benefits From Seller Concessions
Now let’s talk about who benefits from seller concessions?
Well, both the buyer and the seller can benefit, but the first thing that I’d like to talk about is the seller actually benefiting from seller concessions.
And even though the seller’s contributing money to the buyer to lighten the buyer’s load, offering seller concessions can be a huge benefit to a seller to make your property that much more attractive. So in the market that we’re in, as things are starting to change, days on market are going up and there’s more inventory. And again, just to be competitive and with a rising interest rate environment, things have become a lot more expensive for buyers out there.
If you’re a seller and you’re offering seller concessions, it can be that much more attractive to a potential buyer and set yourself apart from other homes out there that might not be, or sellers out there that might not be offering seller concessions to a buyer.
One of the things you can do as a seller, you can write in the listing, you can put it in there that you’re willing to pay seller concessions up to a certain amount that is going to go towards their closing costs or to buy down the rate.
You can put it right in the remark section, so people know that you’re offering seller concessions. So again, it just makes your property that much more attractive and can push a buyer over the edge to lighten their load to make it that much more affordable for them. As a buyer out there, I would in this market ask for seller concessions. And again, seller concessions are going to lighten your load in terms of how much money you have to come in with closing. The one thing seller concessions can’t be used for is your down payment. So you’ve always got to come in with your down payment and then you’ve got all your closing costs as a buyer that those seller concessions can be used for. And you could also, again, talk to your lender and potentially use that money to buy down the rate, to get a lower rate, which I’m going to go over later in this video in order to get your payment down to make it that much more affordable.
So again, seller concessions are beneficial, in my opinion, to both the buyer and the seller. In a market that’s a neutral market and or a buyer’s market to make your property that much more attractive to a buyer, if you’re a seller out there and if you’re a buyer out there, it’s going to save you money and potentially lower your interest rate to get you a lower payment on your monthly mortgage payment.
Seller Concession Limits
One thing to consider, whether you’re a buyer and or a seller, there are limits in terms of seller concessions. And again, you always want to talk to your lender and find out what the limits are and what the money can be applied to. But typically the limits are on a conventional and an FHA loan, you can ask for upwards to 6% of the purchase amount as a seller concession. And on a VA loan, it’s 4%.
So there are limits in terms of the max that you can ask for when it comes to seller concessions. And it’s a lender requirement in terms of the maximum amount.
So again, you always want to check in with your lender, and like I said earlier, you want to make sure if you’re going 6% towards the max, you want to make sure that you’ve got enough closing costs to utilize 100% of it. Usually between a combination of your closing costs and or buying down the rate, you can as a buyer utilize all of your seller concessions. But again, it’s nice to know upfront what the limits are and then again, what you’re going to utilize that money for.
Reach out to a lender and get a good faith estimate. So you can see different scenarios based on the seller concessions that you could potentially get from a seller as a buyer when you’re writing an offer on a home.
What Can Seller Concessions Pay For
What can seller concessions be used for?
And again, you always want to check with your lender and just make sure, but the one thing seller concessions cannot be used for is your down payment. So your down payment is your down payment. So a lot of people think that they’ve got this money and they can use it towards their down payment, which they can’t do.
Seller concessions typically are used for all your closing costs. So you’ve got property taxes, HOA, you’ve got your processing fee, so the lender’s going to charge you all types of different fees.
You’ve got your title insurance, any inspection, so typically seller concessions, that money can be utilized for most everything that’s not your down payment. But again, you want to check with the lender and just make sure.
It nice to get a good faith estimate up front, and figure out what your closing costs are going to be.
Using Seller Concessions To Buy Down Your Interest Rate
The other thing that you can do with that money is buy down that rate. So again, you want to talk with the lender and find out what you would need in order to buy down the rate. And a typical general rule and this is not going to be exact, but usually, 1% of the loan amount will get you about a quarter percent reduction in rate. So again, you want to reach out to your lender, and see what that difference in payment would be. But again, the one thing you don’t want to do is utilize seller concessions to buy down the rate, and then you go refinance. And then that money goes to waste. So typically what you want to do is calculate break even.
So if you took 1% of the loan amount and bought down the rate, there’s going to be a difference in the payment that’s reduced. And then you want to take that difference and divide it into the amount that it took to buy down that rate. And typically breakeven when buying down a rate is about five years. So if you refinance and or sell the property within five years or less, you’re not going to come out ahead. So break even is at about five years. So even though it’s nice to get a lower payment, you don’t want that money to go to waste. So it’s typically better to use the seller concessions to pay all of your closing costs, which will lighten your load in terms of the money that you’ve got to come out of pocket when you go to close.
So again, I would recommend sitting down with your lender and going over all the scenarios in terms of the seller concessions and make sure you have them calculate the break even.
Because again, we’ve been in a rising interest rate environment and at some point rates are going to pull back and you can refinance. And a lot of times lenders will do what they call a no cost refi. So it doesn’t really cost you anything. They roll some of the fees into the loan amount. And so again, if you do refinance within a period of time, that seller concession money that you were given basically is going to go to waste.
Sit down with your lender to know all your options, know your break even, and know where the best use of that seller concession money is put towards when it comes to closing on a property.
Seller Concessions Key Take Aways
The big key takeaways are they’re beneficial to both buyer and the seller. Sellers can really benefit by getting their property sold quicker by offer seller concessions.
And as a buyer, it’s obvious it helps a buyer lighten their load in terms of the money that they’ve got to come out of pocket. The other big takeaway is consult with your lender and go over just so you can utilize 100% of the seller concessions that you’re asking for.
We have some good lenders that we can refer you to when it comes to seller concessions and negotiating it within the contract when you write an offer and submit it over to the seller.
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