What Are Seller Concessions in Real Estate?

Seller concessions in real estate are a negotiated agreement where the seller contributes funds towards a buyer’s expenses at the close of a home purchase. This practice allows for financial adjustments without altering the advertised sale price, facilitating sales by addressing various transfer costs.

Defining Seller Concessions

A seller concession is a portion of the sales price that the seller agrees to pay towards the buyer’s closing costs or other related expenses. This is not a direct cash payment to the buyer but rather a credit applied at the time of closing. The purpose is to reduce the amount of cash a buyer needs to bring to the closing table.

Seller concessions can cover a variety of costs typically borne by the buyer, making homeownership more accessible. Common items include loan origination fees, appraisal fees, title insurance, and prepaid expenses such as property taxes and homeowners insurance premiums. These concessions can also extend to inspection fees or even mortgage discount points, which are paid to reduce the interest rate on the loan. However, seller concessions generally cannot be used for the buyer’s down payment, principal reduction, or for items unrelated to the closing costs, such as new appliances or furniture.

Structuring Seller Concessions

Seller concessions are typically negotiated and documented as an integral part of the purchase agreement or sales contract. The agreed-upon amount can be expressed as a fixed dollar figure or as a percentage of the home’s purchase price. This negotiated term becomes a binding part of the overall real estate transaction.

Upon closing, the agreed-upon concession appears as a credit to the buyer on the Closing Disclosure (CD). The CD summarizes all transaction costs and credits. The funds do not physically change hands between the buyer and seller outside of the closing process. Instead, the concession reduces the total cash the buyer needs to bring to complete the purchase, effectively lowering their out-of-pocket expenses at settlement.

Lender Restrictions on Seller Concessions

Mortgage lenders impose specific limits on the maximum amount a seller can contribute towards a buyer’s closing costs. These restrictions are in place to ensure the integrity of the loan and prevent artificial inflation of property values. The allowable percentage varies significantly depending on the type of loan the buyer is securing and sometimes the loan-to-value (LTV) ratio.

For conventional loans, seller concession limits typically range from 3% to 9% of the purchase price, with the exact cap dependent on the buyer’s down payment (e.g., less than 10% down usually limits concessions to 3%). Federal Housing Administration (FHA) and United States Department of Agriculture (USDA) loans generally permit seller contributions up to 6% of the purchase price or appraised value, whichever is less. For Department of Veterans Affairs (VA) loans, the limit is typically 4% of the loan amount, although certain standard closing costs may not count towards this cap. If the negotiated concession exceeds the lender’s allowable limit, the excess amount cannot be applied, and the buyer will be responsible for covering those additional costs.

Considerations for Buyers and Sellers

Seller concessions can serve as a strategic tool for both buyers and sellers to achieve their objectives in a real estate transaction. For buyers, these concessions are particularly advantageous if they have limited upfront cash available to cover closing costs. By reducing these immediate expenses, concessions can make homeownership more accessible and allow buyers to retain more of their savings for immediate post-purchase needs or unexpected expenses.

For sellers, offering concessions can enhance their property’s attractiveness to a broader range of potential buyers, especially in buyer’s markets or for homes on the market longer. This approach can effectively reduce the net price to the seller without lowering the advertised list price, which some sellers may prefer for perceived value or to maintain comparable sales data. Seller concessions can thus expedite a sale by addressing a common financial hurdle for buyers.