With the housing market stagnant there are a lot of sellers looking to get their homes sold. For buyers, this means you have the pick of the litter and there are quite a few good deals out there. However, buyers and sellers often forget to look beyond price in their strategies for purchasing and selling their homes. One of the tools that can make buying and selling a better proposition can be the use of seller concessions.
Seller concessions are where the seller gives a credit towards the buyers financing to cover closing costs. Lenders will allow the seller to contribute up to six percent of the purchase price towards the financing costs for loans with a loan to value 90% or less and up to 3% for loan to values greater than 90%.
For Buyers: If you are financing a home, you can use seller concessions to pay some or all of your closing costs. This can make the cost of financing substantially cheaper. For instance, if you are buying a $300,000 home and the seller agrees to a 3% seller concession that equates to $9,000 to go towards your closing costs.
For Sellers: Offering concessions can make your property more attractive in a cluttered market. For example, you may use the concession as part of your marketing plan to attract buyers by agreeing to provide seller concessions to buy down the buyer’s interest rate. A 3% seller concession could reduce the buyer’s interest below market. Instead of that buyer getting a rate of about 6% they could buy the rate down with the seller concession to 5.375% giving them a reason to buy your home instead of a competing property without seller concessions.
Pitfalls to watch for…
While seller concessions can be a great tool for both buyers and sellers, there are some rules that need to be followed.
Seller Concessions must be equal to or LESS than total closing costs. The seller concession CANNOT exceed the total closing costs. For example, if the seller concession is $5,000, then the total closing costs will need to be $5000 or more. The lenders will not allow the buyer to keep any surplus concession as cash. They will either require the concession to be reduced and/or the balance of the seller concession to be taken off the purchase price.
Plan ahead of time for seller concessions. If you decide to use a seller concession, do not attempt to raise the price of the home to cover the seller concession. For instance, the home is originally listed at $300,000 and the buyer wants a $5,000 seller concession. In the past, some agents would just raise the contract price to $305,000 and then offer the seller concession. The problem with this approach is that you run the risk of having appraisal issues as the home may not appraise properly. Second, the buyer is essentially financing the concession as part of the purchase. It is not a true “concession” since the seller will be netting the same out in the transaction. During the boom, a blind eye was turned towards manipulating the sales price, but lenders are becoming much more mindful of such practices.
If you are seller and want to use concessions, you should discuss what you are willing to offer and price the home appropriately BEFORE listing the home.
Seller concessions are win-win for both buyers and sellers if done properly. Remember, negotiating to sell or buy a home is not all about the final price. Sometimes there are other ways to offer value to all parties involved.
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