Throughout the whole home buying process there are inevitably questions, discussions, compromises, terms, expectations, and plenty of negotiations. There will be countless conversations between you, your Realtor, and your mortgage advisor about contract terms and financing, but one particularly appealing concept that you may want to discuss is that of seller concessions.
What is a seller concession?
A seller concession, much like the name suggests, is when the buyer requests a seller pay certain agreed-upon costs on the buyer’s behalf. This can range from a couple dollars to tens of thousands of dollars.
At times seller concessions are commonplace and at other times they are almost unheard of. Seller concessions are most commonly affected by the marketplace and attitude of the seller and listing agent.
If the house is in some way defective, such as needing major repairs, a seller concession may be a way to negotiate compensation for what would otherwise be considered unacceptable condition. If the sellers are pressed to get a second mortgage off their hands or are highly motivated to sell the home, this could be a perk they’re willing to throw in to seal the deal.
If on the other hand, the market is heavily in favor of sellers and it is common for multiple offers to be over asking, then asking for seller concessions can irritate a seller no matter how good your offer.
If you’re considering a seller concession, make sure it’s a smart time to do so and pay attention to what the market is telling you
What do seller concessions apply to?
Most loan programs prohibit the seller from contributing to your down payment, but beyond that, most of your closing costs (including prepaid taxes and insurance) are on the table to divvy up between both parties. “Closing costs” is a blanket term for any fees you’ll incur as a part of the transaction. Typically, the buyer assumes responsibility for these costs. A few examples of standard closing costs include:
- Title insurance
- Processing and origination fees
- Inspection fees
- Transfer taxes
Many of the costs incurred can be specific to the house, but they all fall under the general umbrella of “closing costs.”
In addition to the closing costs listed above a borrower will also have to come to the closing with a substantial amount of funds for prepaid property taxes and homeowner’s insurance to set up their impound account (these are known as “prepaids”).
Seller concessions can also be used to pay for prepaids as well. Once you have an idea of how the financials of your specific situation break down, you can begin to consider where - and why - you might request a seller concession.
How do you decide if the situation calls for a concession?
The thing with seller concessions is they’re not commonplace in a seller’s market. Particularly in market conditions where inventory is low, and sellers have their pick of offers, buyers are not in a good bargaining position, so it’s rare to requests of this kind.
If you decide to ask for a seller concession, there should be a good reason for doing so.
Here are a few things to factor in before requesting concessions:
Ask yourself, “Does it make sense for the house and the situation?” This requires giving some thought to the big picture. If you think a concession may be warranted, talk with your agent to get their thoughts and expertise on the matter. After all, this is exactly why you hired them. Your realtor should be able to offer some insight as to what can reasonably be negotiated and what should be embraced as-is.
- The sellers
Keep in mind, sellers are people too. As much as everyone wants to save money buying a house, selling your house is also a big part of your real estate investment and livelihood. It’s wise to take a moment to put yourself in the homeowner’s position, and consider how you might view the concession request.
- Goodwill and opportunity
The escrow process can be a long one if you damage your relationship with the seller immediately, it can be a long and bumpy road. Are you doing inspections? That may be a perfect opportunity to ask for a concession. Do the seller’s need a rent back?
There again, that may be a time to ask for a concession.
The process of buying and selling can be stressful, and there’s a lot of non-monetary value to having a positive relationship between all parties as you move through negotiations, use milestones throughout the process to gradually get what you want, but of course be prepared for the seller to say no as well.
There is a famous story around our office of a buyer who was trying to buy a luxury estate in the downturn of 2011. The buyer kept nickel-and-diming the seller who was in a pinch at the time.
After several counters, the buyer countered one last time asking for the riding lawn mower, and the seller said enough is enough and cancelled the transaction. The seller knew the market was starting to turn, and used the counter offer opportunity to cancel the entire the deal. That house 7 years later is worth roughly $500,000 more than their contract price.
Beware of being too greedy when it’s a buyer’s market because it can comeback to haunt you.
When seller concessions are a reasonable option
When it comes down to it, purchasing a home is a back and forth negotiation with the ultimate goal of finding a win-win for both the seller and the buyer. Sometimes asking the seller to give a little to make the deal happen is more favorable to the seller, and that’s ultimately when it makes the most sense to ask.
1. In a buyers’ market
In a buyers’ market there’s more room to negotiate. Take a moment to see if there is cause to request a concession, but also exercise good judgment in the reasonability of such a request. Don’t lose out on a great deal because of a riding lawn mower. If there is, a buyers’ market is a strategic time where the sellers will be more inclined to agree to give a concession if it means they’ll be able to close the deal and as long as the request isn’t insulting.
2. When there’s room for negotiation
Sometimes, there’s just room for negotiation and it can be as simple as that. This is often true when a home is overpriced, the sellers are on a time crunch or any number of other situations. However, if the house is fairly priced, asking for a concession may get your offer shot down or start the relationship off on a bad foot. It’s an important thing to keep in mind, but if the sellers have left room to negotiate, this could be a perfect strategy for both parties to close the deal.
3. When the home is damaged
If there’s damage or something in less than acceptable condition, that’s a great time to ask the seller if they’re willing to meet in the middle. Whether it’s the carpets or a red flag that turned up during the inspections, if you’re seeing something that’s making you uneasy but you still love the home, requesting a concession can be a really great compromise between both parties.
At this point, you’re already in contract, and the seller has invested time in the transaction, turned other offers away, and will risk having to make additional mortgage and utility payments if the deal goes south and they have to start shopping for a buyer from scratch. The seller might be willing to concede to more at this point than before, simply to save the hassle it would be if the whole sale fell apart.
What if you’re still not sure if you should ask for a seller concession?
By the time you get to the negotiations of buying a home, you should already have a great mortgage advisor and real estate agent in your corner. They’ll have a clear understanding of your needs and financial position, as well as the current market, and will be able to help you make the right call. When in doubt, ask your team.