What Are Buyer Concessions in Real Estate?

Buyer concessions in real estate represent a financial or non-financial incentive provided by a seller to a buyer during a property transaction. These incentives aim to reduce the buyer’s out-of-pocket expenses, making the home purchase more accessible or appealing. Concessions are an integral part of the negotiation process, often utilized to facilitate a sale by addressing potential financial hurdles for the buyer. They can cover various costs that a buyer would typically incur when acquiring a property.

Common Types of Buyer Concessions

A common form of buyer concession involves closing cost credits. The seller contributes money to cover the buyer’s closing expenses. These costs can include loan origination fees, title insurance premiums, appraisal fees, and attorney fees, reducing the cash a buyer needs at settlement.

Repair credits or allowances are another common concession. If a home inspection reveals necessary repairs, the seller might offer a credit to the buyer instead of performing the repairs themselves. This credit is applied at closing, allowing the buyer to manage repairs after taking ownership.

Interest rate buy-downs are also a concession where the seller pays a portion of the buyer’s mortgage interest for a set period, often the first one to three years of the loan term. This reduces the buyer’s initial monthly mortgage payments, providing financial relief. Sellers may also cover prepaid expenses, such as property taxes or homeowners insurance premiums.

In properties governed by homeowners associations, a seller might offer HOA fee credits. The seller covers a certain number of months of homeowner association fees. These concessions alleviate the buyer’s financial burden and can be a factor in finalizing a sale.

How Buyer Concessions Are Negotiated and Documented

Buyer concessions are negotiated as part of the initial offer or during subsequent counter-offers. Buyers might request these concessions to offset immediate costs, especially when they have limited funds for closing. Negotiation can also occur after a home inspection, where identified issues lead to requests for repair credits.

Sellers agree to provide concessions for several reasons. These include expediting the sale, avoiding a direct price reduction, addressing inspection findings without undertaking physical repairs, or attracting buyers in a market where properties are moving slowly. Agreeing to concessions can be a more palatable option for a seller than lowering the listing price.

Once agreed upon, all buyer concessions must be documented within the purchase agreement or through a specific addendum. These documents form a legally binding part of the contract, outlining the nature and amount of the concessions. Proper documentation ensures that both parties understand their financial obligations and benefits.

At closing, these concessions are handled as credits on the closing disclosure statement. The agreed-upon amount is subtracted from the total funds due from the buyer, or added to the seller’s expenses, reducing the cash the buyer needs to bring to closing. This financial adjustment simplifies the transaction for the buyer.

Lender Limitations on Buyer Concessions

Lenders impose limits on the amount of concessions a seller can contribute. These limitations safeguard against artificially inflated property values and ensure the buyer maintains adequate equity in the home. The maximum allowable concession depends on the loan type, the buyer’s down payment, and whether the property will be the buyer’s primary residence.

For Conventional loans, concession limits vary based on the buyer’s down payment. If the down payment is less than 10%, concessions are capped at 3% of the purchase price. For down payments between 10% and 25%, the limit extends to 6%, and for down payments exceeding 25%, it can be 9%. However, for investment properties, concessions are limited to 2% regardless of the down payment percentage.

FHA loans permit seller contributions up to 6% of the sales price or appraised value, whichever is lower. This 6% limit applies to closing costs, prepaid expenses, and discount points. For VA loans, sellers can contribute up to 4% of the loan amount in concessions, in addition to reasonable loan costs. This 4% limit for VA loans covers items like the VA funding fee, prepayment of property taxes and insurance, or paying off the buyer’s debts, but does not include standard closing costs.

If the negotiated concessions exceed these lender-imposed limits, the excess amount cannot be applied to the transaction, or the purchase price may need to be adjusted downward. This ensures that the loan amount is based on a realistic property value and prevents over-financing. Buyers and sellers should communicate with their lenders and real estate agents to understand these limitations and avoid complications during closing.