There is this famous phrase that gets bandied about in the housing market called a “seller’s concession.” It is not a hot dog stand out in front of an open house. It’s also not the seller signing away his first born to a new home buyer. If you are in the home buying or selling market, you want to know exactly what a seller’s concession is and how it can help you.
What is a Seller’s Concession?
Technically, any deviation from the list price is a seller’s concession. Bringing a sale price down by $.01 would count. However, this isn’t what is usually meant by a seller’s concession.
Generally, when someone mentions a seller’s concession, they mean some goodie thrown in with the house outside of reducing the price. Honestly, this concession can be nearly anything. There are urban legends of buyers asking for a ferrari parked in the garage. More commonly, buyers ask the seller to pay part of the closing costs or down payment needed to obtain a mortgage. Some other less common concessions include buying home warranties, PMI policies and remodeling and repairs.
Banks and federal lending agencies will limit these concessions to a percentage of the purchase price. These restrictions vary depending on the lender, but 5% is probably a good average of the concession restriction.
Why Concessions Benefit Buyers
One of the biggest problems that buyers face is in coming up with all the money needed to take out a mortgage. There are origination fees, escrow and down payments to pay. Depending on the home value, the upfront outlay of cash can easily add up to around $10 or $20 thousand.
By asking the seller to pay a portion of the closing costs or down payment, the buyer can in effect, add those costs into their mortgage payment. Since a seller would usually be willing to lower the sale price in lieu of a concession, a buyer is willing to take a higher sale price in exchange for the upfront mortgage obligations.
As you can see, this is a great benefit to buyers. Particularly, those that could afford a mortgage, but don’t have enough savings to buy today.
Why Concessions Benefit Sellers
There are a number of reasons concessions benefit sellers. First of all, it widens the pool of potential home buyers by making cash requirements lower. Also, since buyers are receiving a unique benefit in having lower closing and downpayment costs, the amount of the value of the concession should be lower than the amount you’d need to reduce the price of the house to sell to the same buyer.
What’s the Downside?
Seller’s concessions are a great tool for buyers and sellers to close on a housing agreement. While there are large benefits, there are also negatives to using them.
The main disadvantage to home buyers is that a concession will likely overvalue the home and lead to paying higher property taxes. Property taxes rarely reduce and almost certainly increase from the time a home is purchased. In other words, the tax bill will be inflated for as long as you own the home, with little chance of ever getting in line with true value.
Sellers also take a hit in two ways. Realtors are paid a commission from the sale price of the home.. If that price remains high because of a seller concession, the seller will be overpaying the realtor’s commission. Also, the seller will need to pay more in income taxes if capital gain tax rules apply to your sale.
Still, it’s been a buyer’s market for several years now and a willingness to offer seller’s concessions can greatly improve your efforts in selling your home. Sometimes selling is a far greater benefit than paying carrying costs over future months.