How Seller Concessions Work

Seller concessions in real estate are costs that the seller agrees to pay at closing that would normally fall on the buyer. They increase affordability for the buyer. While not all sellers are open to concessions, seller concessions can ultimately be powerful negotiating tools for both the buyer and seller.

Seller Concessions

Reasons Why Buyers Request Seller Concessions

A buyer can request a portion of their closing costs or prepaid buying expenses covered if they feel they have some bargaining power. Reasons to ask for seller concessions include:

  • The home is in poor condition.
  • The home inspection turns up at least one serious issue that needs addressing.
  • The local market is a “buyer’s market.”
  • Because a home has been on the market for a long time, it’s clear that the seller is having trouble offloading it.

With closing costs accounting for 3% to 6% of a home’s price in most cases, a buyer may simply ask for seller concessions to make homeownership possible by reducing the cost.

The Pros and Cons of Asking for Seller Concessions

Seller concessions allow the buyer to pay less at closing. That can leave more money for moving expenses and repairs. For the seller, the big perk is that seller concessions can be used to get a home off the market sooner. The loss isn’t always so big when considering that every extra month spent on the market is essentially “lost money” for the seller. This is especially true when a seller has already moved into a new home.

The downside to asking for seller concessions as a buyer is that a seller may be turned off because you’re trying to make a deal with strings attached. Some sellers simply aren’t open to price negotiations. In cases where a home has multiple bids, offers with requests for seller concessions will probably be rejected.

Finally, buyers who use concessions to offset a higher offer could end up with a larger loan that costs more to pay off over time.

The downside for sellers is that they are ultimately losing cash.

Is There an Alternative to Asking for Seller Concessions?

Simply making a lower offer can be an alternative to requesting seller concessions. While the effect will be similar, the seller won’t view you as a “complicated” buyer.

Common Seller Concessions

Some buyers might ask the seller to pay a percentage of closing costs. Others ask for specific costs to be covered. Here’s a look at common costs covered under seller concessions:

  • Home appraisal fees.
  • Inspection fees
  • Loan origination fees
  • Mortgage discount points
  • Property taxes through the end of the closing year
  • HOA fees through the end of the closing year
  • Recording fees
  • Title searches
  • Title insurance
  • Attorney fees
  • Repairs or replacements

There are two critical points in the buying process for deciding if you should request seller concessions. The first is when you receive a loan estimate from your lender. This document will detail all of your anticipated closing costs based on the specifics of your loan. Go over the costs with your real estate agent to see if there’s a good opportunity to request concessions.

The second critical point occurs following the inspection. If the inspector uncovers needed upgrades or repairs, these can be brought to the seller.

There Are Limits on Seller Concessions

Sellers are limited in how much they can give up to buyers. The amount a seller can pay is determined by the type of loan being used to purchase a home. With a conventional loan, seller concessions are capped based on the buyer’s down payment size. These are the limits:

  • Down payment of less than 10%: 3% of the loan amount.
  • Down payment between 10% and 25%: 6% of the loan amount.
  • Down payment greater than 25%: 9% of the loan amount.

If a conventional loan is being used for a second property, the limit drops to 2%.

Government-backed home loans also have caps for seller concessions. Seller concessions for Federal Housing Administration (FHA) loans max out at 6% regardless of the down payment amount. Additionally, seller concessions can’t be applied to down payments with FHA loans.

Seller concessions are also capped at 6% of the loan amount for United States Department of Agriculture (USDA) loans. For Veterans Affairs (VA) loans, it’s 4%.

Limits on seller concessions are in place to help control local housing prices. Many buyers use a strategy of making a higher offer to outbid other buyers. However, they plan to use seller concessions to bring the “true” cost of the home down.

While this strategy may help buyers to get what they want, it can also cause local home prices to inflate. Keep in mind that home prices are often based on comparative home sales. Capping how much sellers can pay helps to prevent a dangerous cycle of rapidly rising sale prices in a neighborhood.

Seller Concessions and Taxes

Concessions are generally regarded as tax-deductible sales expenses for the seller. Even the buyer may be able to apply tax deductions to mortgage discount points paid by the seller. However, it’s wise to speak with a tax professional to understand the tax implications of seller concessions for your specific situation.

Deciding If You Should Ask for Seller Concessions

A seller doesn’t have to agree to seller concessions. Understanding whether you’re in a “buyer’s market” or “seller’s market” is important when approaching the topic. Generally, your real estate agent is the best resource for determining if you’re in a good position to request concessions. An agent can also help you itemize your requests in order of importance to boost your chances of covering high-priority costs.

Real estate agents can often pull up comparable local properties that are sold with concessions. These examples can provide important motivation for the seller during negotiations.