As a seller, you hear the term “concession” thrown around in real estate. But exactly what does that refer to? In short, concessions in real estate are incentives like payment for closing costs, necessary repairs, or personal property like furniture that the seller offers the buyer to sweeten the deal and close the sale.
So, for instance, let’s say you’re selling a property, and the home inspection reveals that the HVAC is totally kaput and will require a $10,000 overhaul. You can offer the buyer a $10,000 credit as a concession to apply at closing.
According to the National Association of Realtors’ 2020 Profile of Home Buyers and Sellers, 46% of sellers offered incentives to attract buyers; these incentives included money for closing costs and repairs and inclusions such as furniture, flat screen TVs, and cars.
At first glance, it may seem like concessions always benefit the buyer more than the seller, but that’s not always the case. If you’re hoping to attract offers in a slow market or are motivated to sell quickly, negotiating with concessions helps you close the deal.
With our expert-backed primer, you’ll learn the ins and outs of seller concessions, including examples of different types of concessions, when and how to use them, and how they can benefit both sellers and buyers.
Types of concessions in real estate
You’ll see the term “concession” used in two primary contexts in real estate: financing concessions and sales concessions. Let’s dig into what each of these entails.
Financing concessions cover closing costs
A financing concession is when the seller offers to pay a higher portion of the buyer’s closing costs (typically 2 to 5% of the mortgage). Here are some examples of closing costs a seller can offer to cover as a concession:
- Origination fees: The amount the buyer pays their lender for processing the loan application.
- Discount points: Also called mortgage points, these are fees borrowers pay upfront to lower their interest rate.
- Attorney fees: Payment for an attorney to review closing documents and complete the transaction.
- Recording fees: The cost to document the home’s sale with the local government.
- Appraisal fee: The amount paid to the home appraiser who determined the property’s market value.
- Inspection fees: The cost covering the home inspection, which most buyers use to learn about the home’s structure and systems.
- Title insurance: Insurance that protects the buyer and the lender if a third-party makes a claim on the home’s title.
- Property taxes: The taxes a buyer will owe on the home when the purchase finalizes.
A seller may also offer a financing concession to compensate the buyer for a home repair flagged in the home inspection. Mark Pages-Oliver, a top-selling agent who completes 8% more sales than the average agent in the Concord, California region explains:
“Let’s say new information was found in the inspection period, and it was a surprise — let’s say it’s an extra $20,000 of repair work. The buyer really wants that work done, and the seller agrees that it should be done. The approach commonly applied is that each party might agree to accept 50% of the cost. But instead of doing the work or sending any money, what we would do is give a seller credit to the buyer for that $10,000, which would be applied at closing.”
In this scenario, the $10,000 credit is a financing concession which the buyer would apply towards their closing costs.
Mortgage lenders place limits on financing concessions
When negotiating, you and the buyer can only agree for you to cover closing costs up to the maximum seller contribution limit set by the buyer’s lender.
“We have to make sure that the buyer’s lender is comfortable with the amount of the credit, because all lenders will have a varying tolerance of how much of a credit can be applied at closing,” Pages-Oliver shares.
Lenders set limits to the amount a seller can cover for the buyer for two reasons. One is to ensure the market isn’t being artificially inflated (e.g. the asking price of a house is overpriced by $50,000 over market value but the Seller will give you $50,000 in credits.
In this scenario, the deal may or may not be good for the buyer, but in any event it is inflating the market value and will impact the value of the homes around it).
A second reason is to help ensure the buyer isn’t being tempted into a home they otherwise shouldn’t afford with artificially low closing costs. Basically, the lender does not want the seller’s generous contributions to influence the buyer to purchase a home that they shouldn’t afford.
Seller concessions were used very creatively leading up to the housing collapse and financial crisis of 2008; these limits on seller concessions are one of the many layers of tightened lending guidelines implemented to prevent a repeat of these issues in the future.
As of February 2020, Fannie Mae guidelines set caps on seller concessions — also called “interested party contributions” (IPCs) — for conventional loans as follows:
- 3% maximum if the buyer puts down less than 10% on a primary or secondary home
- 6% maximum if the buyer puts down 10% to 25% on a primary or secondary home
- 9% maximum if the buyer puts down 25% or more on a primary or secondary home (however, note that this would be a very generous concession)
- 2% maximum for investment properties with down payments of any amount
For example, if you’re selling a $300,000 home to a buyer who puts down 10%, then you can only offer to cover up to 3% in closing costs — that’s $9,000 maximum. So you can’t offer $10,000 in closing costs; instead, you would need to adjust the property’s sales price to reflect the amount of contribution that exceeds the maximum ($299,000).
FHA, VA, or USDA loans also have set limits on seller concessions:
- FHA Loans: Seller can contribute up to 6% of the lesser of the sales price or appraised value.
- USDA Loans: Seller can contribute up to 6% of the sale price.
- VA Loans: Seller can contribute 4% of the buyer’s total home loan in concessions. This rule only applies to some closing costs, such as the VA funding fee and payments toward the buyer’s judgments and debts.
Sales concessions are valuable items included in the sale
While financing concessions refer to actual dollars and cents, sales concessions refer to non-realty items of value that the seller includes to incentivize the buyer to purchase their home. Some examples of sales concessions include:
- Provide a decorating allowance, a sum of money for the buyer to put towards a desired renovation or furniture.
- Include furniture or other loose home items, such as window coverings, appliances, or a pool table with the sale.
- Allow the buyer to choose the moving date.
- Offer a one-year home warranty.
- Include a car with the home sale.
Sellers must deduct sales concessions from the home sale price
Mortgage lenders set rules for sale concessions to ensure that the approved mortgage is only financing the home, not the included items of value. According to Fannie Mae, the value of sales concessions “must be deducted from the sales price when calculating the loan-to-value ratio and combined loan-to-value- ratios for underwriting and eligibility purposes.”
For instance, if you sell your home for $300,000 and the buyer wants you to include $5,000 worth of furniture, you cannot adjust the price to $305,000 to include the value of the furniture. Instead, you must include the furniture with the original sale price ($300,000).
Alternatively, a seller and buyer can agree to negotiate these non-realty items of value after the sale concludes and exclude the items from the purchase contract. For example, a seller could agree to sell the buyer their furniture after the home sale at a discounted price as an incentive.
Concessions help sellers close their home sale
Although the seller is making, well, quite literally a concession, seller concessions can benefit the seller, as well.
Concessions speed up negotiations
Oftentimes, a seller can offer a concession during negotiations to help the deal move forward. Let’s say a potential buyer has an inspection contingency and the inspection report reveals that the roof is failing and requires an immediate repair.
“So in that scenario, which we’ve encountered several times, it’s new information, which now by law is attached to the property. So even if this contract doesn’t move forward and it doesn’t close, by law that information now needs to be disclosed to all buyers moving forward,” Pages-Oliver explains.
The seller can keep the deal moving forward with the current buyer by offering the buyer repair credits to cover all or a portion of the roof repair. Otherwise, the seller will need to go back to market and either repair the roof or disclose its condition with future buyers, so using concessions to keep the current buyer engaged is usually the most expedient way to get the deal closed.
Concessions can boost a buyer’s ability to close
In some instances, sellers can offer concessions to help the buyer pay less cash out of pocket for their down payment.
For example, let’s say the buyer wants to purchase a home for $300,000. They’re making a 20% down payment of $60,000, and they’ll owe $10,000 in closing costs. That means they’ll need to pay $70,000 in cash upfront to purchase the home.
However, if the seller and buyer agree to raise the sale price to $310,000 with the seller covering the $10,000 in closing costs, the buyer will only need to pay $62,000 cash up front for their 20% down payment.
The seller still walks away with $300,000, but the buyer pays $8,000 less in cash upfront, as this sum is now included in their mortgage. But it’s important to note that this strategy will only work if the appraisal will support the higher value and the borrower can qualify for the higher loan amount.
Seller concessions keep the ball rolling
To recap, concessions are closing costs or non-realty items of value that the seller offers the buyer to close the deal. The amount of concessions you choose to offer depends entirely on your unique selling position. Evaluate your home’s position, gauge the strength of the market, and heed advice from your real estate agent to determine if you should weave concessions into the negotiation process.
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