What Are Seller Concessions

In the real estate world, there are many deals where the buyer is on the fence about purchasing a home. Sellers can encourage them to follow through with what are called seller concessions. While that may sound like something an agent uses to complicate the sale, it’s actually a straightforward tool that can help during negotiations.

While it’s not as simple as requesting a few thousand dollars before agreeing to close, a few rules and limits ensure both buyers and sellers use concessions fairly. In this blog, we’ll explain in detail what seller concessions are and how you can make the most of them regardless of whether you’re the buyer or the seller.

What Are Seller Concessions?

Seller concessions are costs that they agree to take care of for the buyer, added to the contract in the form of a credit. The buyer can use these credits to pay for things like specific home repairs or property taxes. For example, if a buyer pays $400k for a home, a seller concession can pay for the $8k closing costs. The money would be credited to the buyer and applied at closing.

While these concessions make the deal more affordable for buyers, it isn’t free money. There are restrictions on what the concessions can be used for, preventing them from funding cosmetic renovations or cash back to the buyer. They must be agreed upon, and the purchase agreement/any loan disclosures will explain what the credit is for.

Common costs that a seller concession is used for include:

Closing costs, like title insurance and appraisal fees
Property taxes
Homeowners insurance escrow
Home warranty plans
Repairs found during a formal home inspection

Why Not Lower the Price? 3 Reasons Seller Concessions Are Used

It might seem simpler for the seller to just knock $8k off the price, but there are good reasons to use a seller’s concession, benefiting both the buyer and the seller.

Loan-to-value: Some buyers’ loan programs require a certain amount of the loan to stay eligible, and a price cut could put the amount below the requirement.
Upfront cash needs: a price cut reduces the total, but it won’t help with any funds the buyer needs now for closing. A seller concession frees that money up.
Preserving value of comps and appraisals: Sale prices are public record, used by lenders and investors. Sellers avoid setting a precedent of a lower price by offering concessions instead.

What Can a Seller Cover? How Much Can They Spend?

Since most sales involve a lender, caps are used to prevent seller concessions from being misused. These caps are a percentage of the purchase price, giving sellers a hard ceiling on how much they can offer. Conventional loans cap concessions up to 3-9% depending on the down payment, while FHA loans are generally up to 6%. VA loans cap concessions up to 4%, along with other normal closing costs.

Banks and other lenders also restrict which costs the concessions can pay for. Many programs, for example, allow concessions toward the closing costs but not the buyer’s down payment. The rules change depending on the loan program and specific lender.

How Concessions Can Be Misused

Concessions equal more money for the buyer, so industry regulators and lenders alike monitor them for fraud. Two common red flags are inflating the price and faking costs entirely. Say a home is appraised at $380k, but the contract is written at $400k with $20k in seller concessions. The buyer’s closing costs are only $8k, leaving them $12k left over as cash back. The loan was based on an inflated $400k price, and the lender would disallow the concession once it was noticed.

Buyers and Sellers Don’t Always Agree on Concessions

Even though they’re intended to be mutually beneficial, sellers and buyers sometimes disagree on what the concessions should be used for, becoming a point of tension in the deal.

Appraisal gaps are a frequent source of disagreement. When the appraisal comes in low, both parties may disagree on whether to lower the price or offer a concession. A similar problem arises when a home inspector finds damages that require repairs. The seller may argue the damage is cosmetic or pre-existing, and offer a smaller credit than what the buyer feels is fair. On the other hand, a buyer can demand a concession after finding a new problem during the final walkthrough. In both situations, the other party is caught off guard and may resent the concession.

Sometimes the disagreement is from the lender. Even if the buyer and seller agree on a concession, the lender may reduce or reject it altogether if it exceeds their caps, or the project falls outside their loan program’s requirements.

6 Factors That Affect Seller Concessions

The market conditions: In markets favoring buyers, concessions are common and even expected as part of an offer. But in strong seller’s markets, sellers can afford to refuse them.
Seller’s net proceeds: A concession would lower what the seller walks away with, which feels like the same thing as a price cut to them.
Real estate commissions: Commissions are based on the actual sale price, not the net price after concessions were added. Sellers don’t want to end up paying a regular commission on a higher price while also losing the cash from the concession.
Seller receives multiple offers: In the most competitive markets, buyers who waive concessions make their offers more attractive.
Disclosure requirements: Many states have laws requiring that concessions are disclosed separately from the home’s sale price, offering transparency for lenders and tax assessments.
Tax implications: Speaking of taxes, since concessions can reduce the seller’s net, they can also reduce capital gains. While it’s usually not treated as taxable income for the buyer, it ultimately depends on the specific situation.

Making the Most of Concessions as Buyers and Sellers

If you’re a buyer:

Ask for concessions for cash upfront if those funds can go toward a down payment.
Time the request for after the home inspection or appraisal.
Learn about your loan program’s caps and restrictions.
Determine whether a concession or price drop is best based on what cash you have on-hand vs. the loan’s long-term costs.

And if you’re a seller:

Factor in concessions to your bottom line, as they affect your net proceeds like how a price cut does.
Offer concessions over price cuts if preserving your area’s comps is important.
Request details for vague concessions, since those credits have a higher risk of lender pushback.
And in hotter markets, determine whether you’re open to concessions at all.

Seller Concessions Bridge the Gap to Keep Both Parties Happy

What a buyer can afford and what a seller wants to earn can be very different things, but seller concessions close that gap, clearing up confusion and making everyone happy. To use them properly, make sure that they’re eligible for the loan program’s requirements, and that the other party agrees to them. That way, they won’t cause trouble at the negotiating table.