Handling negotiations between buyers and sellers is a crucial role of a real estate agent. Whether you are representing the buyer or seller, it’s critical that you understand how seller concessions work during the negotiation process – as well as the rules overseeing those concessions. This article answers the question, “What is a seller concession?” and gives the pros and cons of this negotiation tactic.
Consider sharing this information with your buyer or seller client, as we will also address how the recent NAR settlement affects seller concessions.
Related Article: 11 Tips to Master Real Estate Negotiations
What Are Seller Concessions?
Seller concessions in real estate refer to incentives or financial contributions a seller offers to a buyer during negotiations. These concessions can cover various expenses, such as closing costs, inspection fees, or a portion of the down payment. By offering concessions, sellers can make their property more attractive, especially in a buyer’s market, where more properties are available than buyers. However, what can be included as a seller concession varies by lender and loan type.
How Do Seller Concessions Work?
Seller concessions are generally negotiated as part of the purchase agreement. The concession amount may be expressed as a percentage of the property’s purchase price or a fixed dollar amount.
Here’s how a seller concession may work.
A buyer is interested in buying a home that costs $250,000. They have $50,000 for a down payment. However, that leaves them little cash for other expenses, such as closing costs and their buyer’s agent compensation. To keep the deal from falling apart, a seller may agree to provide concessions of 3%, or $7,500, to go toward the closing costs and other relevant expenses. This effectively lessens the financial burden on the buyer and facilitates the purchase while not affecting the property’s value.
Here are some additional ways seller concessions may work to close a deal:
- Price Reduction: Sellers may reduce their property’s listing price to accommodate necessary repairs or updates. For example, suppose the home inspection reveals the need for a new HVAC unit. In that case, a seller can offer concessions in the form of a price reduction to lower the sale price to offset the anticipated cost of the new unit.
- Home Warranty: A seller may offer a home warranty as a concession to provide buyers with peace of mind. A home warranty would cover potential repairs or replacements of major home systems and appliances throughout a specific time period.
Seller concessions are often dependent on the market and can be tailored to meet the needs of both buyers and sellers.
What Can Seller Concessions Cover?
Here are some of the expenses that seller concessions can cover.
1. Loan origination fees
Loan origination fees in real estate are charges a lender imposes for processing a new mortgage application. They are typically a percentage of the total loan amount, ranging from 0.5% to 1%, although they vary. For example, on a $250,000 loan, a 1% origination fee would be $2,500. These fees are usually paid at closing and are part of the overall closing costs of purchasing a property.
2. Attorney fees
Some buyers hire attorneys to review purchase contracts before closing. Attorney fees are typically paid at closing and can be charged as a flat fee or hourly, depending on the agreement between the client and the attorney.
3. Discount points
Some buyers pay to have a lower interest rate on their mortgage loan. This practice is commonly called “buying points.” Each point the borrower buys reduces the interest rate by one percentage point.
4. Inspection fees
Real estate inspectors charge a flat rate to inspect a property for sale. They write an inspection report detailing the condition of the property and its major systems.
5. Property taxes, homeowners insurance, or HOA dues
Seller concessions can be used for other upfront expenses, such as prorated property taxes, homeowners insurance premiums, or HOA dues.
6. Recording fees
Recording fees in real estate are charges imposed by local government offices to record and document the sale or transfer of property ownership. These fees are paid to the county or municipal clerk’s office.
7. Title insurance
Title insurance safeguards property buyers and lenders against financial loss due to defects in a property’s title or legal ownership. A one-time premium is paid at closing, and the seller can pay it as a concession.
8. Buyer’s agent compensation
There is a lot of misinformation about whether a seller can still offer a buyer agent’s compensation as a concession in a real estate transaction. Although there have been a few changes regarding compensation following the recent NAR lawsuit settlement, here are the facts about seller compensation and real estate agent fees.
- Listing agents will no longer be allowed to include compensation offers to buyer’s agents on the MLS.
- Sellers can still offer buyers agent’s compensation in the form of a concession.
- The listing broker can still offer a portion of their compensation to the buyer agent.
- All agent commissions are negotiable.
To learn more about the NAR settlement, visit Colibri Real Estate School’s NAR settlement page.
Seller Concession Limits
There are limits on how much a seller can concede to a buyer in a real estate transaction. The limits are set to discourage inflation in the housing market. Here’s an example of how that may happen.
The asking price for a home is for sale for $250,000. If there were no seller concession limits, the seller could agree to sell the property for $275,000 and offer $25,000 in seller concessions. This practice would cause local housing prices to rise.
For this reason, the total value of concessions is typically limited to a percentage of the property’s sale price, with maximum seller concessions set between 3% and 6%. However, the exact percentage is based on the buyer’s loan type.
Related Article: Homebuyer’s Loan Guide: 7 Types of Mortgage Home Loans
Conventional loans
Seller concession limits for conventional loans typically range from 3% to 6% of the property’s purchase price. However, the limit varies based on factors such as the size of the down payment and the loan-to-value ratio.
FHA Loans
The Federal Housing Administration (FHA) allows seller concessions of up to 6% of the home’s purchase price or the appraised value—whichever is lower.
Related Article: What Is an FHA Loan in Real Estate?
VA Loans
The Department of Veterans Affairs (VA) typically allows seller concessions of up to 4% of the home’s purchase price.
Related Article: What Is a VA Loan in Real Estate?
FAQ: Are real estate commissions affected by seller concession limits?
Real estate commissions are excluded from limits on seller concessions. This means that real estate seller compensation does not count toward the seller concession limit, which makes it easier for sellers to contribute to buyer agent commissions.
Advantages and Disadvantages of Seller Concessions
What are the benefits of seller concessions? Are there any drawbacks to this negotiation practice? Here are the pros and cons of seller concessions in real estate.
Advantages of seller concessions
- Seller concessions can reduce the upfront costs of purchasing a home for buyers.
- Buyers may be able to put more of their available cash into the down payment if seller concessions cover closing costs, etc., allowing them to purchase a more expensive home.
- Seller concessions make a property more attractive to buyers.
- Seller concessions can lead to a faster sale.
- Seller concessions may be considered sales expenses and may, therefore, be tax deductible.
Disadvantages of seller concessions
- Seller concessions will reduce the profit the owner receives when selling their property.
- If the seller increases the home’s price to cover the cost of concessions, the property might not appraise for the higher value, complicating the loan approval process.
- Asking for seller concessions might make a buyer’s offer less attractive to the seller.
When to Ask for Seller Concessions
As a real estate agent, you will be in charge of overseeing negotiations between buyers and sellers. Here are some situations when seller concessions might help close a deal.
- The property is for sale during a buyer’s market. Sellers offering concessions are more likely to attract buyers in a buyer’s market.
- The buyer is facing high closing costs. A seller can help alleviate the buyer’s burden of high closing costs by offering buyer concessions.
- The property needs repairs. If the home inspection reveals necessary repairs, the buyer can request concessions to cover the cost of these repairs.
- The buyer is a first-time homebuyer. First-time buyers who might be short on cash can benefit from asking for concessions to make the purchase more affordable.
- The property has been on the market for an extended time. Seller concessions may help facilitate a sale on a slow-moving property.
- The property has a low appraisal value. If the property appraises lower than the agreed-upon sale price, the buyer might ask for concessions to bridge the gap, making the deal go through without significantly reducing the sale price.
Handling negotiations requires skill and practice. Become a better negotiator for your clients by enrolling in North America’s #1 real estate negotiation training – the Real Estate Negotiation Institute (RENI). RENI has helped more than 70,000 agents become better negotiators since 2006. Enroll in a RENI course today to learn how to streamline closings and maximize profits.
Key Takeaways
- Seller concessions are financial incentives or contributions a seller offers to a buyer during a real estate transaction. These can cover various costs, such as closing fees, inspection expenses, or loan origination fees, and are designed to make the property more appealing, particularly in a buyer’s market.
- Seller concessions are typically negotiated as part of the purchase agreement and can be expressed as a percentage of the sale price or a fixed amount. They help reduce the buyer’s upfront costs, potentially facilitating the sale without altering the property’s value.
- Seller concessions are limited, usually ranging from 3% to 6% of the property’s sale price, depending on the loan type. These limits help prevent home price inflation and ensure that concessions are reasonable and do not adversely affect the market.
- While seller concessions can make a property more attractive and lead to a quicker sale, they also reduce the seller’s net profit. They may complicate the appraisal process if the home’s price is increased to cover the concessions.
Source:
Reid-Simons, Cheryl. “Commissions Won’t Count against Limits, Fannie and Freddie Say.” RealEstateNews.com, April 16, 2024. https://www.realestatenews.com/2024/04/16/commissions-wont-count-against-limits-fannie-and-freddie-say.
