What Are Seller Concessions and How Do They Work?
If you are buying or selling a home, you may be wondering how seller concessions work and when they make sense. They can be a useful negotiating tool in real estate, especially when buyers need help with upfront closing costs or sellers want to keep a deal together without making a larger price reduction.
Understanding how seller concessions affect the sale price, the seller’s net proceeds, financing, and appraisal can help both buyers and sellers make better decisions. In Florida markets such as Wellington and throughout Palm Beach County, seller concessions can come up when buyers are managing high upfront costs that may include insurance, HOA fees, escrows, and other closing expenses. Buyers who are unfamiliar with prepaids and escrow accounts may also want to read about what an escrow deposit is and how it fits into a real estate transaction.
What Are Seller Concessions in Real Estate?
Seller concessions in real estate are when a home seller agrees to pay part of the buyer’s closing costs, prepaid expenses, or other allowable closing costs and settlement charges at closing. These credits reduce the buyer’s upfront cash needed to close, but they also reduce the seller’s net proceeds.
How Do Seller Concessions Work?
Seller concessions are negotiated as part of the purchase contract and agreed to by both the buyer and seller. The agreed amount is applied as a credit at closing and is deducted directly from the seller’s proceeds.
For example, if a home sells for $500,000 and the seller agrees to a $10,000 concession, the buyer still purchases the home at $500,000, but receives a $10,000 credit toward their closing costs. The seller, in turn, nets $10,000 less from the sale.
However, not all sellers will agree to a concession. In addition, loan programs place limits on how much a seller can contribute, and those limits vary based on factors such as loan type and down payment. This is one of the reasons it is important to get approved for a loan before looking at homes and to review concession limits with a lender early in the process.
Seller Concession Limits by Loan Type
Seller concessions are limited by the buyer’s loan program and, in some cases, the down payment amount. Here is a general breakdown of common loan guidelines:
| Loan Type | Maximum Seller Concessions | Notes |
|---|---|---|
| Conventional | Up to 3% if down payment is less than 10% Up to 6% if down payment is 10% to 24.99% Up to 9% if down payment is 25% or more Investment properties: 2% |
Based on loan-to-value ratio; calculated on the lower of the sales price or appraised value. |
| FHA | Up to 6% of the purchase price | Can often be used toward closing costs, prepaids, and other allowable expenses. |
| VA | Up to 4% for certain concessions beyond normal closing costs | Sellers can pay unlimited customary or actual closing costs, such as origination fees and appraisal costs. The 4% cap applies only to non-customary items such as prepaids, discount points, funding fee credits, or debt payoffs. |
| USDA | Up to 6% | Typically based on the sales price and must be for an eligible loan purpose. This can be helpful in eligible rural or suburban areas, so buyers should check USDA eligibility for the specific property. |
These are standard guidelines from Fannie Mae, Freddie Mac, FHA, VA, and USDA. Always verify current limits and allowable uses directly with your mortgage lender, as individual lender overlays may impose stricter rules.
10 Things to Know About Seller Concessions
1. Sellers Net Less
If a buyer submits a full-price offer with a $10,000 seller concession, technically they are offering full price. However, the seller is not receiving full price because they will be netting $10,000 below their list price.
Actually, the seller may end up with even less because seller closing costs are generally based on the sales price. So they would often net more by selling their home for $10,000 less instead of selling it for full price and then crediting the buyer $10,000.
2. Buyer Financing
When a buyer receives a seller concession, they are basically financing their closing costs. Sometimes this is hard for buyers to understand, but if a seller is willing to give a concession toward the buyer’s closing costs, they may also be willing to accept a lower price without a concession.
Here is a quick example. Let’s say a seller agrees to a sales price of $300,000 with a $10,000 seller credit, netting them $290,000. Odds are the seller may also agree to a sales price of $290,000 without a seller credit. In that scenario, the buyer is financing an additional $10,000 in order to pay their closing costs.
3. Paying Market Value
A majority of sellers want at least market value for their homes. So it is unlikely they will accept an offer that is below market value and also asks 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.
4. 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 they actually need because if they ask for $10,000 and only use $8,000, the seller will pocket the extra $2,000. So the buyer will be financing $2,000 more than necessary, which is a win for the seller, but not the buyer.
The buyer’s lender should be able to provide a good-faith estimate with estimated closing costs and help determine how much to ask for.
5. Appraisal Issues
Appraisal issues are not 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 still not appraise.
If the home appraises below the contracted price, there are a few possible outcomes that both parties would need to agree to:
- 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 toward the buyer’s closing costs, which would result in the seller netting even less.
6. 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 that the buyer cannot afford to buy their home if they need help with closing costs, which may make them reject the offer altogether. They may wonder what happens if the inspection uncovers repairs. Will the buyer need or expect the seller to fix them, or will they cancel the contract? What happens if the home does not 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?
7. Percentage vs Dollar Amount
Some home buyers ask for an exact dollar amount of seller concessions, while others ask for a percentage of the purchase price. Either way, it does not make a difference as long as the amount requested falls within the lender-approved amount.
However, whether 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.
8. 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.
9. Seller Concessions vs Other Incentives
Seller concessions are not always the same as every other type of incentive. For example, a seller credit may be used to help pay allowable buyer closing costs, while a rate buydown, builder incentive, or gift funds for a down payment may follow different rules. Some of these costs may still count toward contribution limits, so buyers should review the details with their lender before writing an offer.
10. How Seller Concessions Appear on the Closing Disclosure
Seller concessions typically appear on the Closing Disclosure as a credit to the buyer and a deduction from the seller’s proceeds. This is one reason buyers and sellers should review their closing figures carefully before settlement, so everyone understands how the final numbers work.
Pros and Cons of Seller Concessions
| Benefits | Potential Drawbacks |
|---|---|
|
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Seller Concessions vs Price Reduction: Which Is Better?
Sometimes buyers and sellers debate whether it is better to negotiate a seller concession or simply reduce the purchase price. The answer depends on the buyer’s cash position, financing, and the seller’s net goals.
| Seller Concession | Price Reduction |
|---|---|
| Helps reduce the buyer’s cash needed at closing | Lowers the purchase price |
| Keeps the contract price higher | May reduce some costs tied to the sales price |
| Buyer may finance more over time | Does not directly help with upfront closing cash as much |
| Can be useful when buyer cash is tight | Can be simpler in some negotiations |
In many cases, the seller’s bottom line may be similar either way. The main difference is whether the buyer needs help at closing or would rather lower the sales price instead.
When Are Seller Concessions Most Common?
Seller concessions are often more common in slower-moving markets, balanced markets, or situations where sellers need to be more flexible to attract strong offers. They can also come up when buyers face higher upfront costs, when a home has been sitting on the market longer than expected, or when a first-time buyer is using a low-down-payment loan program.
In some situations, seller concessions are also negotiated after inspections when a buyer would rather receive a credit at closing than have the seller complete repairs before settlement.
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 or improvements to the home, it may be worth financing their closing costs. And if a seller is still able to net top dollar while giving a seller concession, it can be a win for them too.
Now, there may be a few drawbacks to seller concessions, such as a low appraisal. But if both parties go into the situation knowing this is a possibility, it may become a non-factor. Not all home buyers need seller concessions, so sellers should never automatically dismiss an offer asking for them. Instead, they should evaluate how the entire offer affects their bottom line and the overall strength of the deal.
For buyers and sellers in Wellington and nearby Palm Beach County areas, understanding seller concessions can make a big difference when negotiating an offer. Every situation is different, which is why it helps to review both the financing side and the seller’s net before making a decision.
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If you are buying or selling a home you might be wondering what seller concessions are. Here are 10 things buyers and sellers should know about seller concessions. #homebuying #homeselling #realestatePopular Questions About Seller Concessions
Do seller concessions come out of pocket from the seller?
No, seller concessions do not usually come out of the seller’s pocket. They typically come out of the seller’s net proceeds at closing. However, if the seller owes more than the home is worth, then the seller concession would effectively have to come out of pocket, which is one reason sellers in that position are unlikely to agree to them.
Can seller concessions be used for down payment?
No, seller concessions cannot be used for a buyer’s down payment. The credit can only be used toward the buyer’s closing costs, escrows, and pre-paids. However, gift money can often be used toward a buyer’s down payment, which is something the buyer should discuss with their lender.
Wondering how to write an offer with seller concessions?
When writing an offer that includes a request for a seller credit, there is specific language that needs to be used. Typically, it is fairly simple, something along the lines of the seller agrees to credit the buyer $10,000 toward their closing costs, escrows, and pre-paids at closing.
Can a buyer request a seller concession for home repairs?
Yes, it is 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 flooring, repair an appliance, or handle another update may not be an option. This is where a seller credit can sometimes help bridge the gap.
Can seller concessions be used for a rate buydown or discount points?
In many cases, yes. Seller concessions can often be used toward allowable rate buydown costs or discount points, as long as the total contribution stays within the loan program’s limits.
What happens if seller concessions exceed the allowed limit?
If the agreed seller concession is higher than the loan program allows, the excess usually cannot be used as-is. That is one reason buyers, sellers, and lenders should review the numbers carefully before finalizing the contract.
Are seller concessions taxable?
Tax situations can vary, so buyers and sellers should speak with a tax professional about their specific circumstances. Real estate and mortgage professionals can explain how concessions affect a transaction, but tax advice should come from a qualified advisor.
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.
Michelle Gibson of the Hansen Real Estate Group Inc. who has specialized in Wellington, Florida, real estate since 2001. She combines community knowledge with effective marketing, technology, and social media to help buyers, sellers, and renters throughout Wellington.