When you decide to purchase a house, there are many expenses to consider. These include having the property inspected, searching for the property title, starting a home loan, or fixing up a property that’s not move-in ready. These costs can accumulate quickly, especially if you’re already paying for a down payment and a home appraisal.
Seller concessions offer a way to lower significant expenses for buyers and can ease the transaction process for both parties involved in the sale. Whether you’re selling a home and looking to attract buyers, or you’re a buyer seeking favorable terms and reduced upfront costs, seller concessions present an opportunity for mutual gain. Let’s dive into how seller concessions work in practice.
Exploring the Concept of Seller Concessions
In Independence, Missouri, stands a white house adorned with shutters. John Collins, from CoStar, discusses seller concessions as a strategic tool for homeowners to entice buyers and speed up the selling process. Sellers provide incentives or cover certain closing expenses to help buyers make offers and finalize deals more smoothly.
Typical Closing Costs for Buyers
Many buyers encounter various costs when closing a deal, in addition to the down payment. These can include:
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Title insurance
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Mortgage loan origination fees
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Prepaid property taxes
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Prepaid homeowners insurance premiums
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Appraisal fees
According to the Consumer Financial Protection Bureau (CFPB), the average closing costs can be around $6,000. Sellers might choose to cover some of these expenses (or offer credits) to attract buyers and make their property more appealing. These credits are typically deducted from the seller’s proceeds at closing rather than paid upfront.
Home Warranties
Offering a home warranty provides buyers with reassurance that they won’t be left covering major repair costs, especially with older properties or outdated appliances. Home warranty plans usually cost a few hundred dollars annually but are far more affordable compared to installing a new HVAC system or replacing major appliances before closing.
Fixing or Upgrading Allowances
Enhancing an outdated property with a renovation credit can greatly increase its appeal to buyers. If an inspection reveals that certain repairs or upgrades are needed, using seller credits to cover these expenses can be a smart solution.
Typically, both parties benefit:
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Buyers get a say in selecting replacements, like new carpet or appliances.
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Sellers can move the closing forward without delay, even if repairs are needed.
Terms for these credits can be negotiated to balance costs and responsibilities between both sides.
Interest Rate Reduction (Buydown Programs)
Although mortgage interest rates remain competitive historically, they are higher than the record-low rates seen in 2020–2022. Buyers may be tempted by a seller’s offer to help lower their rate temporarily through an interest rate buydown.
An interest rate buydown allows homebuyers to enjoy a lower interest rate during the first one or two years of their mortgage, reducing monthly payments and total loan costs. Some sellers cover the cost of a buydown instead of negotiating on the home’s price.
For example:
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The seller offers $8,000 in credits to lower the buyer’s interest rate to 6% for the first two years.
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This results in a payment of $3,045 per month, saving $329 monthly during that time.
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Over two years, the buyer saves about $7,896.
If instead the seller had lowered the home’s price by $8,000, the buyer’s monthly savings would only be about $49—not nearly as attractive for those concerned with short-term affordability.
Understanding the Mechanics of a Buydown
For example:
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Original price: $550,000
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Buyer negotiates to $495,000 with a 7.25% interest rate, resulting in a $3,375 monthly payment.
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Alternatively, the seller provides an $8,000 concession, lowering the loan amount temporarily with a reduced rate for two years (around 5%), resulting in a $3,049 monthly payment for those first two years.
In another scenario, an $8,000 price reduction from $542,000 to $487,800 (around an 8.9% discount) could result in savings of approximately $3,320 overall.
Advantages of Seller Concessions
Buyers often see seller concessions as opportunities to save money and benefit from additional perks, such as:
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Lower upfront costs
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Improved purchasing power
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Flexibility in negotiations
If problems arise during a home inspection or if updates and repairs are needed, seller concessions offer a way to address them without delaying the closing process.
Tips for Negotiating Seller Concessions
In a balanced market, where neither buyers nor sellers have a clear advantage, seller concessions become a useful negotiation tool. Buyers should:
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Research the property: Understand market value to negotiate effectively.
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Know your mortgage options: Be aware of how concessions can affect your loan.
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Make a strong offer: A competitive proposal with clear concession requests has a higher chance of acceptance.
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Prioritize needs: Focus negotiations around what matters most, such as a renovation credit or an interest rate buydown.
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Be prepared to walk away: Understand your limits; sometimes concessions negotiations can be deal-breakers.
Factors Sellers Should Keep in Mind
When offering concessions, sellers aim to make their listing more attractive. However, certain limits apply, especially depending on the type of loan:
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VA Loans: Up to 4% of the total purchase price in concessions.
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FHA Loans: Up to 6% of the purchase price or appraised value (whichever is lower).
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USDA Loans: Up to 6% of the purchase price.
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Conventional Loans:
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3% concessions if the down payment is less than 10%
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6% concessions for down payments between 10–25%
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9% concessions for down payments over 25%
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Investment Properties: Maximum 2% concessions allowed, regardless of down payment.
Conclusion
Negotiating seller concessions can benefit both buyers and sellers, whether it’s covering repair costs, assisting with closing fees, or reducing interest rates. The best approach depends on market conditions, loan types, and the priorities of everyone involved.
For personalized advice or to navigate concessions effectively, it’s best to consult a certified local real estate agent.
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