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What Are Seller Concessions In Real Estate?

What Are Seller Concessions In RealEstate?

Whether you’re selling your home oryou’re in the market to purchase ahome, seller concessions are somethingyou should be aware of and have agood understanding of. Sellerconcessions effect both buyer’s andseller’s, in two completely differentways.

The easiest way to define sellerconcessions is a monetary contributiongiven by a home seller to a potentialhome buyer to use towards their closingexpenses and prepaid items. There arepositives and negatives to sellerconcessions for a potential buyer as wellas a home seller.

What are seller concessions? What arethe positives and negatives to sellerconcessions? What mortgage productsallow for seller concessions? Can I denyoffering seller concessions? Will theseller offer seller concessions?

These are just a few questions that arefielded by real estate professionalsregarding seller concessions. Here is anin-depth analysis of many of the abovequestions to help you understand sellerconcessions and to also help you makean educated decision on whether sellerconcessions are necessary during yourhome purchase or sale.

Mortgage Products Allowing SellerConcessions

There are many mortgage products available for home buyer’s. Many of which allow a buyer to purchase a homewith little to no money down, mainly because the products allow for seller concessions. Below are many of themortgage products that are available to a home buyer that allow seller concessions.

FHA Loans – Federal Housing Administration

FHA loans are one of the most popular home financing loans out there. Many first time home buyers take advantageof FHA loans for a few different reasons, one being the fact that FHA loans allow a buyer to receive up to 6% of ahomes purchase price towards their prepaid items (taxes and/or insurance) and closing costs. Another primaryreason first time home buyers often take advantage of FHA loans, besides seller concessions, is the low 3.5% downpayment.

USDA Loans – United States Department of Agriculture

USDA loans are another mortgage product that allows a buyer to receive seller concessions. A seller is able tocontribute up to 6% in seller concessions, just like FHA loans. One difference between FHA and USDA loans and theamount of seller concessions that are allowed is that if a bank appraiser can determine concessions over 6% doesnot negatively impact value, there are cases a buyer is able to receive more than 6% in seller concessions.

Conventional Loans

There are many different types of conventional loans. There are conventional loans that are available for first timehome buyers that provide grants and incentives, and also other conventional loans that allow a buyer to eliminatemortgage insurance. A buyer who is putting the minimum 5% down on a conventional loan is able to receive up to 3%in seller concessions. If a buyer is putting more than 10%-25% down on a property, they are able to receive up to 6%in seller concessions. If a buyer is putting 25% down or more, they are able to receive up to 9% in sellerconcessions.

VA Loans – Veterans Administration

VA loans allow a buyer to receive up to 4% in seller concessions. There are also additional percentages that can beobtained by a buyer to help cover other closing expenses. If you’re a Veteran, it’s best you discuss how much youcan receive in seller concessions with a top rated local mortgage lender.

In fact, during a recent closing in Penfield, NY, a Veteran buyer was able to receive over $10,000 in sellerconcessions on a home that was purchased for $150,000. The Veteran only had to come up with very little of theirown funds to purchase the home.

Don’t Be Greedy & Ask For Seller Concessions Unless Necessary!

Do You Really Need Seller Concessions?

This is a question that can only be answered by a potential home buyer. Before thinking about asking a seller tocontribute towards closing costs and prepaid items, it’s important a buyer determines if they truly need sellerconcessions. Most people don’t like to deplete their bank accounts purchasing a home, which is understood,however if you don’t really need seller concessions, don’t ask. Why wouldn’t you want seller concessions?

The biggest reason you shouldn’t ask for seller concessions if you don’t need them to purchase a home is the factyou will be paying more for a home when receiving seller concessions than you would if you weren’t asking for them. For example, if a seller agrees to contribute 6% of the $200,000 purchase price, the buyer would be purchasing thehome for $200,000. The buyer would be receiving $12,000 in seller concessions, therefore in theory, they could offer$188,000 for the home and the offers would be similar to a seller. The difference for a buyer in this example is theywould be paying roughly $70-$80 more per month on their mortgage and the interest that would accumulate over 30years is quite significant.

There is no doubt that seller concessions are very important to the real estate industry and allows many homebuyer’s the ability to purchase a home. This does not mean seller concessions are something that every buyerneeds to ask for, bottom line, if you don’t need the seller concessions, don’t ask.

Multiple Offers & Seller Concessions

Asking for seller concessions can be acostly mistake for some home buyer’s ina multiple offer situation. There areseveral things that a buyer can do tohelp win in a multiple offer situation. Notasking for seller concessions is one wayto strengthen an offer. If there are twosimilar offers on a property, one offerasking for seller concessions and oneoffer not asking, it’s extremely likely thebuyer not asking for seller concessionswill win.

Why would a seller want to take oneoffer over another because the buyerisn’t asking for seller concessions? Oneof the biggest reasons is that a buyerwho is asking for seller concessionsversus a buyer who isn’t, must not haveas much money saved for a homepurchase. In many cases this canindicate to a seller that, in theory, thebuyer who doesn’t need sellerconcessions is a stronger buyer.

The True Seller Net Proceeds

Seller concessions are able to help abuyer purchase a home but remember,what is offered is not what the seller willtruly net. Buyer’s need to keep in mindwhen asking for seller concessions howit will effect the seller’s bottom line.

For example, if a home is listed for$100,000 and a buyer offers $100,000and doesn’t ask for any sellerconcessions, the net offer would be$100,000. If the same home owner receives an offer for $100,000 from a buyer who requests 6% in sellerconcessions, a seller will not view this as an offer for $100,000 but rather an offer for $94,000 after subtracting the$6,000 they will be contributing in seller concessions.

Seller Concessions Can Create Low Appraisal Problems!

Potential For Low Home Appraisals

In the above example of the homeowner who had their home listed at $100,000 and received the net offer of $94,000,could the offer be countered even though the offer price is full price? The answer is yes, however, it does come withsome added risks for the seller. It’s fairly common that when a buyer needs seller concessions to be able to purchasea home, they offer more than the asking price. This can help increase the seller’s net proceeds. If the buyer whooffered $100,000 and asked for 6% in seller concessions offered $105,000 and asked for 6% in seller concessions,

the net is different. The seller would be looking at a net offer of $98,700, which is a considerable difference from$94,000.

This sounds great for the seller, right? Wrong. Potentially a problem couldarise during the transaction with thehome under appraising. If the seller’shome was priced right and the purchaseprice had to be raised to help increasethe seller’s net, it can actually push thesale price higher than a bank appraisercan substantiate. Challenging a low realestate appraisal is not an easy task andin many cases, is unsuccessful.

Final Thoughts

As mentioned above, seller concessionsare an absolute necessity for the realestate industry. Without sellerconcessions, the industry couldpotentially take a crushing blow, for theworst. There are certain circumstanceswhere asking for seller concessionsmakes perfect sense for a buyer andother circumstances where it makesabsolutely no sense.

The biggest thing to remember aboutseller concessions when buying a homeis, if you don’t need them, don’t ask forthem. For a seller, remember, thatwithout seller concessions, the potentialbuyer pool would be substantiallysmaller and you may not be able to sellyour home. If you choose a top Realtorto represent your best interests, theyshould be able to discuss with you boththe positives and negatives to sellerconcessions.

Other Top Real Estate Resources For Home Buyers & Sellers

Tips For Dealing With Low Appraisals For Buyers and Sellers via Las Vegas Luxury Home Pro

Let’s Make A Deal: Seller Concessions On A VA Loan via Veterans United

Top Frequently Asked Questions From Home Seller’s via Rochester’s Real Estate Blog

Why Do Appraisers Ask Real Estate Agents About Concessions? via Sacramento Appraisal Blog

Top Frequently Asked Questions From Home Buyer’s via Rochester’s Real Estate Blog

How To Avoid Sticker Shock At The Closing Table When Buying A Home via Great Colorado Homes

How Much Will It Cost To Sell My Home? via Imagine Your House

Whether you’re thinking of selling a Rochester, NY home or considering a Rochester, NY home purchase, youshould understand what seller concessions are and what effects they can have on both buyer’s and seller’s. Theabove information should help you understand both the positives and negatives from both perspectives. If you’researching for a Rochester, NY Realtor who has experience dealing with seller concessions, contact me, as I’d love toexplain how my expertise can make your home negotiations smooth and relatively stress free!

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About the authors: The above article “What Are Seller Concessions In Real Estate?” was provided by the KeithHiscock Sold Team (Keith & Kyle Hiscock). With over 30 years combined experience, if you’re thinkingof selling or buying, we’d love to share our knowledge and expertise.

We service the following Greater Rochester NY areas: Irondequoit, Webster, Penfield, Pittsford, Fairport, Brighton,Greece, Gates, Hilton, Brockport, Mendon, Henrietta, Perinton, Churchville, Scottsville, East Rochester, Rush,Honeoye Falls, Chili, and Victor NY.

Visit our website at www.HiscockHomes.com.

© 2015, Kyle Hiscock. All rights reserved.