What are Seller Concessions and How Do They Work?

If you are buying or selling a home you might be wondering what are seller concessions and how they work. First, it’s important to know a seller concession, seller contribution, seller credit, and closing cost credit from the seller are the same thing.

So if you’re buying a home and your lender suggests asking the seller for a closing credit it’s the exact same thing as a seller concession. Or if you’re selling a home and the buyer is asking for a seller contribution towards their closing costs it also is the same as a seller concession.

What are Seller Concessions and How Do They Work?

A seller concession is when a buyer asks the seller for a monetary contribution towards their closing costs, escrows, and/or pre-paids. This amount of money will be deducted from the seller’s proceeds. Unless the seller owes more than their home is worth then the seller would have to bring the funds to closing.

Now buyers need to understand not all sellers will agree to a seller concession. Plus, not all loan programs will allow them and if they do there will most likely be restrictions. This is one of the many reasons it’s important to get approved for a loan prior to looking at homes.

8 Things to Know About Seller Concessions

Sellers Net

If a buyer submits a full-price offer with a $10,000 seller concession technically they are offering full price. However, the seller isn’t receiving the full price, they will be netting $10,000 below their list price.

Actually, they will be getting even less because the seller will be paying closing costs based on the sales price. So they’d actually net more if they sold their home for $10,000 instead of selling it for full price and crediting the buyer $10,000.

Buyer Financing

When a buyer receives a seller concession they are basically financing their closing costs. Sometimes it’s hard for a buyer to understand this, but if a seller is willing to give a concession towards the buyer’s closing costs they will most likely be willing to take a lower price without a concession.

Here’s a quick example; let’s say the seller agrees to a sales price of $300,000 with a $10,000 seller credit, netting them $290,000. Odds are the seller will agree to a sales price of $290,000 without a seller credit. Therefore, the buyer is financing an additional $10,000 to pay for their closing costs.

Paying Market Value

A majority of sellers want at least market value for their homes. So it’s unlikely they will accept an offer that is below market value that is also asking for seller concessions. Once again even if a buyer is willing to pay “market value” as soon as a seller concession is added the seller may no longer be receiving market value for their home.

Knowing the Exact Amount

A buyer should never “shoot for the stars” and ask for the maximum amount of seller concessions allowed.

They should only ask for the amount needed because if they ask for $10,000 and only use $8,000 the seller will pocket the $2,000. So the buyer will be financing $2,000 more than they needed to, a win for the seller, but not the buyer.

The buyer’s lender should be able to provide a good-faith estimate with their estimated closing costs and help them determine how much to ask for.

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Things to Know About Seller Concessions Continued

Appraisal Issues

Appraisal issues aren’t uncommon with or without seller concessions. So if a buyer is willing to pay above market value in order to receive seller concessions the property may not appraise. In fact, even if a buyer is paying market value with a seller concession the property may not appraise. If the home appraises below the contracted price there are a few possible outcomes that both parties will need to agree to, which are listed below.

• The buyer can remove the seller concession and pay their own closing costs.
• The buyer and seller can renegotiate the seller concession and possibly meet in the middle.
• The seller can reduce the purchase price to the appraised value and still contribute towards the buyer’s closing costs, which would net the seller even less.

Multiple Offers

As mentioned above, if a buyer submits a full price offer the seller will not be netting full price if a seller concession is included in the offer. This is important for buyers to understand in a multiple-offer situation because a seller’s net usually plays the biggest role in their decision.

Plus, the seller may be under the impression the buyer can’t afford to buy their home if they need help with their closing costs, which may make them reject the offer altogether. They may wonder, what happens if the inspection undercovers repairs, will the buyer need or expect the seller to fix them or will they cancel the contract? What happens if the home doesn’t appraise, does the buyer have the funds to cover any shortfall, go without a credit from the seller or will they have to cancel the contract?

Percentage vs Dollar Amount

Some home buyers will ask for an exact dollar amount of seller concessions. While others will ask for a percentage of the purchase price. Either way, it doesn’t make a difference as long as the amount requested falls within the lender-approved amount.

However, regardless if a percentage or dollar amount is requested it should only be for the amount of money the buyer actually needs and is going to use.

Paying Closing Costs on Seller Concessions

Both parties will be paying closing costs based on the purchase price, not the purchase price minus seller concessions. So if both parties agree to a purchase price of $400,000 with a $20,000 concession everyone’s closing costs will be based on $400,000, not $380,000. While the difference may not be significant, maybe a few hundred dollars, those numbers can add up quickly when buying or selling a home.

Final Thoughts

Oftentimes seller concessions have a negative connotation associated with them. However, they can be a win-win for both buyer and seller. If a buyer wants to do repairs/improvements to the home it may be worth financing their closing costs. And if a seller is able to net top dollar giving a seller concession it can be a win for them too.

Now, there may be a few drawbacks to seller concessions, like a low appraisal. Mind you if both parties go into the situation knowing this is a possibility it could become a non-factor. Not all home buyers need seller concessions, so sellers should never dismiss an offer asking for seller concessions.

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Popular Questions About Seller Concessions

Do seller concessions come out of pocket from the seller? No, seller concessions do not come out of the seller’s pocket, they will come out of the seller’s net proceeds at closing. However, if the seller owes more than their home is worth then the seller concessions would need to come out of the seller’s pocket, which it’s unlikely any seller will agree to do so.

Can seller concessions be used for down payment? No, seller concessions can not be used for a buyer’s down payment. The credit can only be used towards the buyer’s closing costs, escrows, and pre-paids. However, gift money can typically be used towards a buyer’s down payment. This is something that should be discussed with the buyer’s lender.

Wondering how to write an offer with seller concessions? When writing an offer that is going to include a request for a seller credit there is specific language that needs to be used. Typically it’s pretty simple, something along the lines of “the seller agrees to credit the buyer $10,000 towards their closing costs, escrows, and pre-paids at closing.”

Can a buyer request a seller concession for home repairs? Yes, it’s not uncommon for buyers to request a seller concession to put toward a home repair. A lot of buyers use a good portion of their savings for their down payment and closing costs, so having the funds to replace the carpet or an appliance may not be an option. This is where a seller may be offering a credit to do so or the buyer may request one.

About the Author

The above real estate article “What are Seller Concessions and How Do They Work?” was written by Michelle Gibson of Wellington Florida Real Estate. Specializing in residential real estate since 2001 Michelle Gibson is experienced in assisting buyers, sellers, landlords, and tenants. She would love to share her knowledge and expertise and guide you through the entire real estate process.

We service the following areas; Wellington, Lake Worth, Royal Palm Beach, Boynton Beach, West Palm Beach, Loxahatchee, Greenacres, and more. If you are considering selling your home, we welcome the opportunity to work with you and list your home with a top Wellington Florida Realtor.

What are Seller Concessions and How Do They Work?