Seller concessions are the closing costs that a homeowner agrees to pay while selling a house.
Seller concessions can sweeten the deal for both the buyers and sellers. Buyers usually focus on the price of the property, but there are additional costs involved which increase the price of the house significantly.
- How is seller assist beneficial for sellers? Offering seller concession helps the seller to expedite the home sale process.
- How is seller credit beneficial for buyers?Sellers pay for the buyer’s closing costs which makes the home price more affordable for buyers.
- What are the limits on seller concessions? Sellers only pay the closing cost on buyer’s mortgage. But the limits for seller credit varies as per type of loans.
- What are the disadvantages for sellers paying closing costs? There are several drawbacks for sellers in offering concessions, one of it is reduced the net profits.
Seller Concessions Meaning
In real estate terms, seller concessions, seller credits or seller assist is a transaction where the seller agrees to contribute towards a portion of the buyer’s closing cost. This is done to make your house more appealing to potential buyers and expedite the sale.
Sometimes buyers can ask the sellers to contribute for specific costs or the sellers can simply pay a percentage of the total closing costs.
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Who Benefits from Seller’s Concession?
Seller Concessions are beneficial to both buyers and sellers.
How is Seller Credit Beneficial for Sellers
- Attract Buyers: Sellers can attract potential buyers by offering seller credits at closing in a competitive market. This can be used as a tool by sellers to bargain for a higher sale price.
- Fast Sale: Seller concessions are typically effective in a buyer’s market when there are more homes than buyers. It helps to sell your property faster and spend less time on the market.
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How is Seller Assist Beneficial for Buyers
- Financial Assistance: Seller concessions help buyers to cover the closing costs if they do not have cash on hand.
- Affordable for New Buyers: First-time buyers often underestimated the costs associated with buying a house. The seller’s contribution makes the home affordable for buyers.
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How much do sellers pay in closing costs?
Typically a seller pays 8% to 10% of the sale price. Closing cost for sellers depends on several factors such as the location of the house, lender costs, terms of sale, and buyer and seller negotiations.
The expenses involved in the seller’s closing costs are:
- Agent Commissions: A real estate agent charges between 4% and 6% commission on the sale price. However, you can work with a discount real estate broker and pay a low commission of up to 0.5% to 2%.
- Transfer Tax: Transfer tax or title fees are imposed by the government on real estate transactions. You will pay the tax for the transfer of the title from the seller to the buyer. Transfer tax varies as per the state you sell your house in.
- Title Insurance: The cost of title insurance ranges between $1,000 and $4,000. Title Insurance is useful to protect the new homeowner’s rights from any future disputes. Commonly sellers secure this cost for the buyers.
- Escrow Fees: Escrow companies charge either a flat fee or around 1% of the home sale price. They manage the real estate transactions up to closing. This includes signing and recording the closing documents.
- Prorated Property Taxes: Property Owners are responsible to pay the property taxes and HOA for their property until the closing date.
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Seller Concessions: Pros and Cons
It is the seller’s choice to pay for the buyer’s closing cost. Seller credit comes with advantages and disadvantages for both buyers and sellers. You need to consider the following factors before you choose to offer seller credits:
Pros for Sellers
- Attract More Buyers: Seller assist can make your property attractive to potential buyers. Financial assistance can help the seller to broaden the pool of affordability to buyers.
- Paced Selling: If the buyer struggles for money to cover the closing costs, seller credits help to fill the gap. Seller concessions can eliminate the potential hurdles and elevate the home sale process.
Cons for Sellers
- Reduced Net Profits: Seller credits will reduce the net sale profit for the seller. The concession amount directly impacts the seller’s financial planning.
- Negative Perception: Offering seller credits can make an impression that the property has some issues and the seller is desperate to sell it fast. This perception can make the house sit on the market unsold for a longer time.
- Higher Costs: Being a seller you will look for a higher selling price for your house. But closing costs are generally based on a percentage of the sale price. So, the higher the selling price, the higher the closing costs.
Pros for Buyers
- Affordability: Seller concessions cover the extra costs of the buyers and make buying a home easier. If sellers cover the closing costs it is more affordable for potential buyers with limited funds upfront.
- Negotiation Power: Seller concessions can enhance the negotiating power of buyer. So agreeing to pay the closing costs can lead the buyers to ask for additional discounts and limit the negotiating power of the seller.
- After Sales Repairs: Buyers can contact sellers in the initial period of buying the house to make necessary repairs. It is the seller’s responsibility to pay for the fixes if the seller’s credit limit is not reached.
Cons for Buyers
- Higher Purchase Price: As a buyer, you may have to bid for a higher purchase price to make your offer stand out. There would be more buyers available in the market due to seller credits.
- Offer Rejections: Seller concessions are more effective in a buyer’s market. In a competitive market, there are multiple offers on a house. This can make the seller reject your offer for a few extra dollars.
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How to Negotiate Seller Credit
Negotiating for sellers concessions can be an effective strategy to reduce the upfront costs as a buyer.
- Determine the Market Condition: Understanding the housing market conditions can be beneficial to negotiate concessions. Sellers agree to discounts more easily if the house is not selling quickly.
- Consult a Real Estate Agent: It is helpful to consult a local real estate agent before you enter into a home negotiation. This can also give you an idea about the homes closed in the neighborhood with concessions.
- Make a Reasonable Request: Determine the seller’s motivation and listed price of the property to make a fair request for seller credits. Factors such as the condition of the house, market status, and duration the property has been on the market.
- Prioritize Requests: Estimate what costs you want the seller to accommodate in the concession. Be open to negotiating and consider alternatives. You can opt to pay the closing costs yourself and lower the price of the house.
Is There a Limit on Seller Concessions
Yes. Seller concessions have various limitations depending on the factors such as the type of loan and guidelines set by the lender. Generally, conventional loans have strict limits compared to other government-backed loans.
The seller’s contribution cannot exceed your total closing costs.
For example, say your mortgage approval amount is $200,000. As per the average closing cost of 6%, the seller is legally bound to contribute $12,000. However, if the closing costs on the mortgage are $8,000, the seller will not pay more than $8,000 in this case.
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Types of Loans with Limit on Seller Concessions
The seller’s credit varies as per the type of loan. The sale price or the appraised home value dictates the seller’s concession.
For instance, if you list your property on MLS for $210,000 and the appraised value comes out to be $200,000. The seller will legally contribute for the closing costs on the appraised value i.e. $200,000.
Private lenders issue conventional loans. These are not backed by government agencies such as Fannie Mae and Freddie Mac. The maximum seller concessions allowed for a conventional loan depends on the percentage of purchase price ranging from 2% to 9%. The exact limit depends on the buyer’s down payment amount.
|Down Payment||Estimated Seller Concession|
|Less than 10%||Up to 3%|
|Between 10% and 25%||Up to 6%|
|Over 25%||Up to 9%|
|Note:||For an investment property seller concession is limited to 2%, irrespective of the down payment.|
FHA Loans Seller Concessions
Sellers typically are allowed to contribute up to 6% concession under the FHA loans.
VA loans permit seller concessions up to 4%. Moreover, VA loans can include other payments such as buyer’s judgment, debts, and VA funding fees as well.
USDA loans allow sellers to pay up to 6% of the buyer’s loan amount as seller concessions. Seller concessions for this loan type do not depend on the home price or appraised value.
However, it’s important to note that guidelines and limits are subject to change over time for USDA loans.
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Are Seller Concessions Common?
- Negotiation Tool: Seller concessions are common in a real estate transaction and are used as a negotiation tool to address the concerned buyers. It depends on the local market conditions and other factors.
- Offered in Buyers Market: Sellers most likely offer credits in a buyer’s market with more inventory. Common forms of concessions are contributing towards closing costs, repairs costs, and, offer price reductions.
- Seller Concession Extent: The seller concession extent depends on the mortgage type, down payment, and property condition. However, seller concessions are not guaranteed in every transaction.
In the current market situation, where homes are staying for longer on the market and home sales is dropped by 22.5%. Sellers can offer concessions to buyers to move out fast from the market.
We recommend you work with a local real estate agent. These agents are well-informed about the market conditions and can give you appropriate advice.
Frequently Asked Questions
1. What is a seller credit in real estate?
Seller credits are concessions to incentivize buyers to make an offer on your home. Seller credit are used as a negotiation tactic by home sellers.
2. Can seller concessions be used for down payment?
No. Seller's credits are used to provide financial assistance to the buyer in closing cost. There are limitations for sellers on seller concession .
3. Is seller credit to buyer tax deductible?
Yes. A seller's credit is a sales expense the home seller encounters when selling a house. So, it is tax-deductible.
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