In a broad sense, concessions in real estate are benefits offered by either party to help a house sell and close. Usually, though, when we think of a concession, we think of:
- Sellers giving money back to buyers
- Covering closing costs
This is a common practice and doesn’t affect the seller’s bottom line. There is a risk, though, that the house won’t appraise for the sale price. If this happens then the buyer must find another way to cover their expenses.
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How Do Concessions Work in Real Estate?
A concession works when the seller increases the price of the home a specified amount, and then gifting it to the buyer to cover closing costs. An example might be that a buyer does not have enough cash to pay for closing costs. In this case, we will say the buyer needs $5,000 and the price of the home is $300,000.
- Seller raises the sale price in the contract to $305,000
- The property must appraise for $305,000 instead of $300,000
- Seller gifts the money to the buyer, and the funds offset costs at closing
As you can see the seller ends up with the same amount. In the end, the buyer simply rolls their closing costs into the mortgage. The seller does not lose anything unless the house does not appraise for the higher value.
Are Seller Concessions in Real Estate Common?
Seller concessions are common, and even more so in a buyer’s market. There are several reasons that these often occur today:
- Closing costs are expensive, usually between 2% – 5% of the sale price.
- Many buyers factor in down payment but no other expenses.
- Sellers can lure more buyers without getting less money.
While this happens in every kind of market, it happens more in buyers’ markets when homeowners must compete more aggressively to attract potential buyers.
What Concessions Should You Ask For?
Buyers ask for help with closing costs. There is a variety of these, including:
- Property taxes
- Title insurance
- Loan origination
- Inspection
- Recording fees
- Appraisal
- Attorney’s fees
- Points
The best thing to do is to sit down with your realtor and talk to them about your situation. A good one will guide you and recommend the best concessions to ask for in your situation.1
Exceed Closing Costs
Seller concessions cannot exceed closing costs. If you get more money than you need then you have two options:
- Return the money to the seller
- Put the money toward paying down points on your loan
You cannot pocket the funds, because it is illegal. It is a fraud.
Towards Down Payment
Seller concessions cannot be used towards the down payment. Lenders are specific about where buyers get the money the put down on the loan.
Concession a Good Idea?
A seller’s concession is a good idea if you don’t have enough money to pay your closing costs as a buyer, and if you want the house to sell faster as a seller. On the other hand, there are some reasons it may not be:
- If the market is hot the seller may not accept the deal
- If the market is cold the house may not appraise
- Any money you roll into your mortgage you will pay interest on over the life of your loan
Unless you really don’t have enough money to cover everything it is better not to roll extra into your mortgage.
Concessions in Real Estate Based on Purchase Price or Loan Amount?
Seller concessions are based on the purchase price, not the loan amount. Also, banks calculate the amount you can get from buyers differently for different kinds of loans. Conventional, Federal Housing Authority (FHA), Veterans Administration (VA), and United States Department of Agriculture (USDA) loans all have different requirements. Below, we will outline the basic maximums but check with the program that you are using to learn the details about the loan parameters.2
Maximum Concessions on a Conventional Loan
With a conventional loan, the maximum seller concession depends on how much you put down and the type of property you buy. Maximum seller-paid concessions are:
- 3% for residential properties with less than 10% down
- 6% for residential houses with 10-% – 25% down
- 9% for residential properties with more than 25% down
- 2% for investment properties with any amount down
Maximum Concessions on FHA, VA, and USDA Loans
The maximum seller concession for an FHA loan is 6%.
For VA loans the seller may contribute up to 4% of the sale price.
If you get a USDA loan the seller can contribute up to 6%of the sale price.
Concessions Effect Appraisals?
Seller concessions do affect how appraisers do their job. This is because concessions raise the price of the house beyond what the seller actually sold the house for.
- Appraisers need to know the true value of the home
- Comparable property comparisons determine the value that banks use to determine loan amounts
- If the appraisal value is inaccurate it affects the integrity of the mortgage
Banks need to know the actual value of a property. If the numbers are skewed up it makes the loan riskier. It is better for everyone if lenders limit, as much as possible, bad loans.
Tax-Deductible?
As with most tax questions whether your seller concession is tax-deductible depends on your situation. In general, you can deduct expenses associated with your home sale from your capital gains (if you have any). These include almost any expense provided they don’t physically affect the property. Before deducting these on your taxes you should consult your accountant or tax preparer about specifics of your sale.
Concession Vs. Price Reduction
So far, we examined concessions in the context that the buyer doesn’t have enough cash to pay closing costs. However, what happens if that is not the case? What if the seller simply wants to give an incentive to potential buyers to purchase his house?
Whether to use a price reduction or seller concession to lure potential buyers may surprise you. For a price reduction the buyer’s mortgage payment goes down, down payment goes down, and closing costs stay about the same.
For a concession, the buyer has two options. One is to put it toward the closing costs and the remainder to pay points to reduce the interest rate on their loan. The other option is to pay closing costs out of pocket and use the entire amount to pay points.
For the first case, the comparison shows that the buyer pays less on the loan but more on the closing costs with a price reduction. It depends on the buyer’s situation (how much cash they have for fees at closing) which one is better.
For the second case, the buyer will pay more closing costs but much less interest over the course of the loan. Therefore, if the buyer has enough money then a concession as an incentive is much better than a price reduction.
No Concessions in Real Estate Meaning
A no concessions statement on a listing means that the seller will not entertain the possibility. No one makes them accept this option. Sellers may not want the hassle. They may not want to risk the house not appraising. They may feel that a buyer who does not have enough money for closing costs is too risky. Finally, they may feel that they don’t have to entice buyers beyond the condition and price of the property.
