Seller Concessions 101: A Guide for First-Time Homebuyers or Sellers
Almost everything in a real estate transaction is negotiable, and seller concessions are no exception.
Seller concessions are when the seller agrees to pay a part of a buyer’s closing costs. These concessions can make buying a house more affordable and can also be valuable negotiating tools for both parties.
In this post, we will dive into the basics of seller concessions and how they work. We'll also discuss when seller concessions might be a good option for buyers and sellers.
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What Are Seller Concessions?
Seller concessions, also known as seller contributions or assists, help reduce the home buyer’s closing costs, making it financially easier for them to purchase a home. They are usually seen when the housing market benefits buyers and less so in a seller’s market.
In a buyer’s market, a greater supply of homes is available, so homeowners often need to make their home stand out in order to sell. Sellers in these markets may use tactics like reducing the purchase price of the home or agreeing to pay some or all of the closing costs for the buyer.
In a seller’s market, there are more potential buyers than there are homes available. When this happens, you’ll often see homes sell for well above their appraised value or asking price. You’ll also see fewer seller concessions because home sellers tend to have more negotiating power and therefore do not need to incentivize buyers.
How Do Seller Concessions Work?
There are several reasons why a buyer may ask for seller concessions during the homebuying process, such as:
- When a buyer believes that the seller is overestimating their home’s value
- If a buyer is worried about covering both the down payment and closing costs when making their initial offer
- If a home inspection reveals costly issues that could impact the closing process , the buyer can ask that the seller pays to fix them prior to selling
- It’s a buyer’s market, and a buyer uses repairs or coverage of upfront costs by the seller as leverage for a better deal or purchase price
Who Benefits from Seller Concessions?
Buyers — particularly first-time home buyers — can greatly benefit from utilizing seller concessions.
There’s many more costs associated with buying a new home than just a home loan and saving up for a down payment. Buyers have to budget for closing costs, moving costs, homeowners insurance, property taxes, appliances and furniture costs, and much more.
Asking for seller concessions can help reduce your financial burden as a homebuyer. Even if the seller only agrees to pay for the appraisal fees, title insurance, or additional inspection fees, every little bit can help.
Seller concessions can also benefit you as the homeowner or seller. If you’re trying to sell your home in a saturated housing market, offering to pay for some or all of the closing costs could make your home more enticing to potential buyers.
Types of Seller Concessions
There’s no shortage of seller concessions a buyer can request.
Here are some examples of closing costs that could be up for negotiation:
- Title insurance: Title insurance fees cover any problems that could arise regarding the legal ownership of a home, including fraud, prior forgeries, an undisclosed heir, etc.
- Property taxes: Property taxes could be negotiated to be prepaid by the seller at closing.
- Appraisal fees: The mortgage lender requires that you, as the borrower, get a home appraised to determine how much the mortgage loan amount should be, this appraisal cost can be covered by the seller.
- Inspection fees: While a home inspection is considered an upfront cost, other inspections may be required for a real estate transaction to go through. For example, some states may require a pest inspection, which can be covered by the seller.
- Loan origination fees: Origination fees are what a lender charges you to process your loan. Usually, it’s somewhere between 0.5% to 1% of your loan’s total balance.
- Attorney’s fees: Attorney’s fees pay for the attorney who reviews your closing documents to make sure everything is accurate.
- Recording fees: When you make a home purchase, it must be documented with your local government. Recording fees are what it costs to do so.
- Mortgage points: Mortgage points, or discount points, refers to the amount of money you prepay to reduce your interest rate. One discount point usually equates to 1% of your loan amount. This will save you money in the long run because it reduces the amount of your monthly mortgage payment.
What Are Seller Concession Limits?
While seller concessions can be incredibly helpful, they have their restrictions. The limitations of seller concessions are often linked to your loan type.
For a conventional loan, your seller concession limits vary based on the size of your down payment. A seller can contribute 3% if your down payment is 10% or less, 6% if your down payment is between 10% and 25%, and up to 9% if your down payment is higher than 25%.
For FHA loans and USDA loans, a seller can usually contribute up to 6%. For VA loans, sellers can contribute up to 4% and may assist with additional VA funding fees.
Pros and Cons of Seller Concessions
Seller concessions come with benefits and drawbacks for both buyers and sellers.
Pros for the Buyer
As a buyer, you can:
- Reduce your out-of-pocket closing costs
- Save money that you can spend on other aspects of the homebuying process (e.g., moving costs, painting, buying new furniture, etc.)
- Increase your offer amount if the market is competitive
Cons for the Buyer
Here are some of the risks for a buyer:
- The seller may decline your offer if you attach concessions to it
- If you use seller concessions as a means of increasing your offer, you’ll potentially need a more expensive loan
Pros for the Seller
As a seller, you can:
- Entice more potential buyers, which is often necessary in a competitive market
- Potentially sell your home faster in a competitive market
Cons for the Seller
- The more concessions you agree to, the less money you’ll make on your sale
- If you include concessions before a potential buyer makes an offer, you may end up paying for items you wouldn't have to otherwise
Take Control of Your Real Estate Transaction
Home buyers and sellers don’t know what they don’t know about real estate transactions. Seller concessions are often a vital part of the negotiation process and can make a deal more enticing.
One of the main reasons buyers try to find a real estate agent to help them with a home purchase is because the traditional real estate process is daunting by design. However, the more you learn about your options, the less daunting the real estate process will become.
That’s where Aalto comes in.
Aalto is a direct real estate platform that provides you with insider information normally reserved only for agents. We’re shifting the balance of power in residential real estate away from industry insiders and toward consumers.
Like seller concessions, our services can benefit buyers and sellers alike. We offer buyers access to exclusive inventory, while also helping sellers accept offers that are right for them. We’re also there to handle all legal documents and negotiations. Are you ready to take control of your homebuying process? Get started today!