What Are Buyer Concessions in Real Estate?

Buyer concessions in real estate are agreements where the seller covers certain costs typically borne by the buyer. These arrangements help buyers reduce upfront out-of-pocket expenses. Concessions can be a strategic tool, particularly in market conditions where sellers aim to attract more buyers or facilitate a quicker transaction.

Defining Buyer Concessions

Buyer concessions, also known as seller concessions, are incentives a seller provides to a buyer. For buyers, these concessions reduce the immediate financial burden of purchasing a home. For sellers, offering concessions can make their property more attractive, potentially leading to a faster sale, especially in a market with more homes available than interested buyers. This helps bridge the gap between buyer affordability and seller objectives, ensuring the deal progresses smoothly.

Common Categories of Concessions

Buyer concessions often assist with various expenses. A frequent type involves contributions towards closing costs, which are fees incurred to finalize the mortgage and property transfer. These can include loan origination fees, appraisal fees, title insurance premiums, escrow fees, and legal fees. Closing costs typically range from 2% to 5% of the home’s purchase price, representing a significant upfront expense for buyers.

Another common category is prepaid expenses, which are costs paid in advance at closing for items like property taxes and homeowner’s insurance premiums. Sellers might also offer repair credits or undertake direct repairs based on issues identified during a home inspection. Additionally, concessions can extend to non-realty items of value, such as including personal property like appliances or furniture in the sale, or offering a home warranty.

Negotiating and Limiting Concessions

Buyer concessions are proposed and formalized as part of the purchase agreement. Buyers, often with the guidance of their real estate agents, can request specific concessions during the offer stage or following a home inspection. Buyers should research local market conditions and understand the seller’s motivation, as this influences the seller’s willingness to agree to concessions. All agreed-upon concessions must be clearly documented in the contract to be binding.

Lenders impose limits on the amount of concessions a seller can contribute, with these limits varying based on the loan type.

Loan Type Limits

For conventional loans, the maximum seller contribution depends on the buyer’s down payment: 3% of the sales price for down payments less than 10%, 6% for down payments between 10% and 25%, and 9% for down payments exceeding 25%. For investment properties financed with conventional loans, the limit is 2% regardless of the down payment.

FHA loans permit up to 6% of the sales price in seller concessions. VA loans are more flexible, allowing sellers to pay all reasonable and customary closing costs without limit, in addition to up to 4% of the purchase price for specific items like pre-paid expenses, funding fees, or buydowns. These limits ensure the loan amount accurately reflects the property’s value and prevents over-financing. Concessions cannot be used to fund the buyer’s down payment.

Impact on Home Financing

Buyer concessions directly impact the cash a buyer needs at closing. While concessions make a home purchase more affordable upfront, they do not reduce the principal amount of the loan. If concessions are requested, the sales price might be slightly increased to cover these costs, which would then be rolled into the loan amount, leading to a higher overall loan and potentially higher monthly payments.

The appraisal process considers concessions. Appraisers evaluate whether concessions influenced the sales price of comparable properties and adjust their valuations accordingly. If an appraiser determines the sales price was artificially inflated to accommodate large concessions, the appraised value might come in lower than the contract price. This could require the buyer to bring additional cash to closing to cover the difference between the appraised value and the inflated purchase price. Concessions are applied as credits towards allowable closing costs or other agreed-upon expenses, and buyers do not receive cash back at closing.