What Is a Buyer Concession in Real Estate?

Buyer concessions in real estate involve a seller covering specific expenses or providing financial benefits to a buyer as part of a home purchase. These concessions are a common strategy to make a property more appealing or to facilitate a sale. They integrate into the overall negotiation, allowing both parties to reach mutually agreeable terms beyond the simple sales price.

Defining Buyer Concessions

Buyer concessions fundamentally involve the seller providing funds or services that reduce the buyer’s out-of-pocket costs at closing. This means the buyer pays less cash upfront for expenses typically associated with purchasing a home. Sellers often offer these concessions to enhance property attractiveness, especially in a buyer’s market, or to expedite a sale. They can also be a way to address issues identified during a home inspection without directly lowering the listed sales price.

While concessions reduce the immediate cash outlay for the buyer, the cost is often factored into the home’s final sales price. This means the concession amount is typically financed as part of the buyer’s mortgage loan. For example, if a seller agrees to a $5,000 concession on a $300,000 home, the buyer might pay $300,000 but receive $5,000 from the seller at closing to cover specific costs. This structure allows the buyer to conserve their personal funds.

Types of Concessions

One prevalent form of buyer concession involves closing cost credits, where the seller covers a portion of the buyer’s expenses incurred at closing. These costs can include lender origination fees, title insurance premiums, escrow fees, and attorney fees. Providing a credit for these expenses directly reduces the cash required from the buyer on the closing day.

Another common concession is repair credits or allowances, which address issues discovered during the home inspection. Instead of the seller completing repairs before closing, they might offer a credit to the buyer, allowing the buyer to manage repairs after taking ownership. This provides the buyer with flexibility and control over the repair process.

Sellers can also offer to pay mortgage points or facilitate an interest rate buy-down for the buyer. Mortgage points are fees paid to the lender at closing to reduce the interest rate on the loan, making monthly payments more affordable. Additionally, credits for prepaid expenses, such as property taxes or homeowner’s insurance premiums due at closing, are another type of financial assistance a seller might provide.

Negotiating and Documenting Concessions

Buyer concessions are an integral part of the real estate negotiation process between a prospective buyer and a seller. Discussions typically begin when the buyer submits an initial offer, which may include a request for specific concessions, or during counter-offers. The final agreed-upon concessions result from this back-and-forth communication, where both sides aim for favorable terms.

Once an agreement is reached, these concessions must be precisely documented within the purchase agreement or an official addendum. The documentation must clearly specify the exact amount of the concession and its intended purpose, such as a credit towards closing costs or a specific repair allowance. Clear language in the contract helps prevent misunderstandings or disputes. This formal inclusion ensures all parties, including the lender and title company, are aware of and can properly account for the agreed-upon financial adjustments.

Lender and Appraisal Considerations

Lenders impose specific limitations on the amount of seller concessions allowed, typically expressed as a percentage of the sales price. These limits vary based on the loan type and the buyer’s down payment.

For conventional loans, seller contributions are capped at 3% for down payments less than 10%, 6% for down payments between 10% and 25%, and 9% for down payments of 25% or more. Federal Housing Administration (FHA) loans permit seller concessions up to 6% of the sales price. For Veterans Affairs (VA) loans, seller concessions are limited to 4% of the property’s reasonable value, which can include items like prepaid taxes and insurance, but not discount points.

The presence of concessions can also influence the home appraisal. If the total sales price, including concessions, appears inflated compared to comparable properties, the appraisal might come in lower than the contract price. A lower appraisal can impact loan approval, as lenders base their loan amount on the appraised value or sales price, whichever is lower. Seller concessions cannot be used to provide cash directly back to the buyer, and any amount exceeding lender limits must be reduced or forfeited.