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Whether you’re selling your home or you’re in the market to purchase a home, seller concessions are something you should be aware of and have a good understanding of. Seller concessions effect both buyers and sellers, in two completely different ways.
The easiest way to define seller concessions is a monetary contribution given by a home seller to a potential home buyer to use towards their closing expenses and prepaid items. There are positives and negatives to seller concessions for a potential buyer as well as a home seller.
What are seller concessions? What are the positives and negatives to seller concessions? What mortgage products allow for seller concessions? Can I deny offering seller concessions? Will the seller offer seller concessions?
These are just a few questions that are fielded by real estate professionals regarding seller concessions. Here is an in-depth analysis of many of the above questions to help you understand seller concessions and to also help you make an educated decision on whether seller concessions are necessary during your home purchase or sale.
Mortgage Products Allowing Seller Concessions
There are many mortgage products available for home buyers. Many of which allow a buyer to purchase a home with little to no money down, mainly because the products allow for seller concessions. Below are many of the mortgage 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 advantage of FHA loans for a few different reasons, one being the fact that FHA loans allow a buyer to receive up to 6% of a homes purchase price towards their prepaid items (taxes and/or insurance) and closing costs. Another primary reason first time home buyers often take advantage of FHA loans, besides seller concessions, is the low 3.5% down payment.
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 to contribute up to 6% in seller concessions, just like FHA loans. One difference between FHA and USDA loans and the amount of seller concessions that are allowed is that if a bank appraiser can determine concessions over 6% does not negatively impact value, there are cases a buyer is able to receive more than 6% in seller concessions.
There are many different types of conventional loans. There are conventional loans that are available for first time home buyers that provide grants and incentives, and also other conventional loans that allow a buyer to eliminate mortgage 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 seller concessions.
VA Loans – Veterans Administration
VA loans allow a buyer to receive up to 4% in seller concessions. There are also additional percentages that can be obtained by a buyer to help cover other closing expenses. If you’re a Veteran, it’s best you discuss how much you can 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 seller concessions on a home that was purchased for $150,000. The Veteran only had to come up with very little of their own funds to purchase the home.
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 to contribute towards closing costs and prepaid items, it’s important a buyer determines if they truly need seller concessions. 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 fact you 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 the home 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 they would be paying roughly $70-$80 more per month on their mortgage and the interest that would accumulate over 30 years is quite significant.
There is no doubt that seller concessions are very important to the real estate industry and allows many home buyer’s the ability to purchase a home. This does not mean seller concessions are something that every buyer needs 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 a costly mistake for some home buyer’s in a multiple offer situation. There are several things that a buyer can do to help win in a multiple offer situation. Not asking for seller concessions is one way to strengthen an offer. If there are two similar offers on a property, one offer asking for seller concessions and one offer not asking, it’s extremely likely the buyer not asking for seller concessions will win.
Why would a seller want to take one offer over another because the buyer isn’t asking for seller concessions? One of the biggest reasons is that a buyer who is asking for seller concessions versus a buyer who isn’t, must not have as much money saved for a home purchase. In many cases this can indicate to a seller that, in theory, the buyer who doesn’t need seller concessions is a stronger buyer.
The True Seller Net Proceeds
Seller concessions are able to help a buyer purchase a home but remember, what is offered is not what the seller will truly net. Buyer’s need to keep in mind when asking for seller concessions how it will effect the seller’s bottom line.
For example, if a home is listed for $100,000 and a buyer offers $100,000 and doesn’t ask for any seller concessions, 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 seller concessions, 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.
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 with some added risks for the seller. It’s fairly common that when a buyer needs seller concessions to be able to purchase a home, they offer more than the asking price. This can help increase the seller’s net proceeds. If the buyer who offered $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 could arise during the transaction with the home under appraising. If the seller’s home was priced right and the purchase price had to be raised to help increase the seller’s net, it can actually push the sale price higher than a bank appraiser can substantiate. Challenging a low real estate appraisal is not an easy task and in many cases, is unsuccessful.
As mentioned above, seller concessions are an absolute necessity for the real estate industry. Without seller concessions, the industry could potentially take a crushing blow, for the worst. There are certain circumstances where asking for seller concessions makes perfect sense for a buyer and other circumstances where it makes absolutely no sense.
The biggest thing to remember about seller concessions when buying a home is, if you don’t need them, don’t ask for them. For a seller, remember, that without seller concessions, the potential buyer pool would be substantially smaller and you may not be able to sell your home. If you choose a top Realtor to represent your best interests, they should be able to discuss with you both the positives and negatives to seller concessions.
Other Top Real Estate Resources For Home Buyers & Sellers
Whether you’re thinking of selling a Rochester, NY home or considering a Rochester, NY home purchase, you should understand what seller concessions are and what effects they can have on both buyer’s and seller’s. The above information should help you understand both the positives and negatives from both perspectives. If you’re searching for a Rochester, NY Realtor who has experience dealing with seller concessions, contact me, as I’d love to explain how my expertise can make your home negotiations smooth and relatively stress free!
About the authors: The above article “What Are Seller Concessions In Real Estate?” was provided by the Keith Hiscock Sold Team (Keith & Kyle Hiscock). With over 30 years combined experience, if you’re thinking of 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.
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