Throughout the home buying process, there will inevitably be 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 you may want to discuss is seller concessions.
What is a seller concession?
A seller concession is when the buyer asks the seller to pay for certain agreed-upon costs on the buyer's behalf. These costs can range from a couple of dollars to tens of thousands of dollars.
Sometimes seller concessions are commonplace, and 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 somehow defective, such as needing major repairs, a seller concession may be a way to negotiate compensation for otherwise unacceptable conditions.
If the sellers are anxious 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.
On the other hand, if market conditions favor sellers and there are likely to be multiple offers over asking price, requesting 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 tells 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 items 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 substantial funds for prepaid property taxes and homeowner's insurance to set up their impound account (these are known as "prepaids").
Seller concessions can also cover prepaids. 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 see this kind of request.
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?" Give some thought to the big picture. If you think a concession may be warranted, talk with your agent and get a second opinion. After all, this is precisely why you've got one on your team. Your Realtor should be able to offer insight into what to negotiate and what to embrace as-is.
- The sellers
Keep in mind that sellers are people too. As much as everyone wants to save money buying a house, selling your home is also a big part of your real estate investment and livelihood. 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 feel very long if you damage your relationship with the seller immediately. Are you doing inspections? Do the sellers need a rent back? That may be a perfect opportunity to ask for a concession.
Buying and selling can be stressful. 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 client 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 lawnmower. The seller said enough is enough and canceled the entire transaction. The seller knew the market was starting to turn and used the counter offer opportunity to cancel the whole deal. Nearly a decade later, that house is worth roughly $500,000 more than their contract price.
Beware of being too greedy when it's a buyer's market. It could come back to haunt you.
When seller concessions are a reasonable option
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 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 and try to be reasonable. You don't want a lawnmower to be the reason you lose out on a great deal.
- When there's room for negotiation
Sometimes, there's simply more room for negotiation than other times. It can be as simple as that. This is often true when a home is overpriced, or the sellers are on a time crunch. However, if the house is priced fairly, asking for a concession may get your offer shot down or start the relationship off on the wrong foot. It's an important thing to keep in mind, but if the sellers have left space to negotiate, this could be a perfect strategy for both parties to close the deal.
- 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. If you see something that makes you uneasy but still want the home, requesting a concession can be a great way to strike a compromise.
At this point, you're already in contract. The seller has invested time in the transaction, turned other offers away, and risk having to make additional mortgage and utility payments if the deal goes south. The seller might be willing to concede to more at this point than before, simply to save the hassle of starting again from scratch.
What if You're Still Not Sure if You Should Ask for Concessions?
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.