Seller concessions.... what are they???

In this article, a local real estate broker explores the concept and practice of seller concessions in today's real estate transactions.

Seller concessions…. what are they??

I just got off the phone with a client and was explaining seller concessions to them, which made me think… This is a good blog topic. Seller concessions… what are they?? What does it mean when the buyer asks for cash back? Does it mean the seller has to give them a check at closing? How does it effect the transaction??

Many buyers today are taking advantage of both the low cost of housing and the historical low interest rates by asking seller’s for concessions at closing. In a hypothetical transaction of a house with an agreed sales price of $300,000 the buyer would ask for the seller to contribute $5,000 towards the buyer’s closing costs. This is the concession on the seller’s part; they understand that in the sale of $300,000.00 they will only gross $295,000.00 with the remaining $5,000 being applied to some of the buyer’s costs at closing.

What sorts of costs do these concessions pay for? We often refer to them as “pre-paids” and closing costs. They include things like property taxes that need to be paid at closing, insurance policies that most lenders require be paid in full at closing, and other fees associated with the loan like mortgage insurance premiums and origination fees. With so many buyers taking advantage of low FHA loans that require a down payment as low as 3.5% there can be many expenses associated with these loans. Your mortgage broker or banker will be able to tell you which costs involved in your purchase are qualified to be paid for with these seller concessions best, as they sometimes vary with the type of loan and the lender.

Seller concessions sometimes allow your buyer to make the purchase happen and often allow the seller to still gross the same figure as they might have without the concession. For example, in the above situation of the $300,000.00 sale that seller may have already agreed in negotiations to accept a sale price of $295,000.00. The $5,000 concession allows the sale to be a little more manageable for their buyer and as long as the property appraises for the agreed upon figure the seller still walks away with what they agreed to. Everyone gets what they want; the seller sells, the buyer buys and is able to cover their expenses of their loan and roll that extra $5,000 into their mortgage at an unheard of interest rate in today’s market… a "win-win" for all involved.

In today’s unpredictable real estate market, this has become a common practice in an effort to better facilitate transactions. If you have questions or concerns please feel free to contact me or my staff. You can also look to your mortgage broker, banker or real estate attorney for guidance on how this might effect your bottom line.

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

invzbldog June 19, 2012 at 12:12 PM
Very informative article. Thank you.
Vicki Clark March 24, 2013 at 07:48 PM
Thanks for reading - happy to write on any topics or questions you may have.


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