Please ask your Realtor and Lender about Seller Concessions

[AJ Wong]

To be fair, I'm posting this as much for investors as I am for other Realtors. Partly because in times like these (or any market really) seller concessions can be an excellent tool for improving buyer conditions, but also because when I write offers inclusive of a concession I'd like the Realtor's on the receiving end to know how to present them to their sellers effectively. 

That's not necessarily a knock on other real estate brokers, seller concessions are difficult to digest but Realtor's on the 'other side' sometimes treat an offer with a concession like it's the "boogeyman." Yes, there is math, and other elements that can can easily effect one's full comprehension about how they 'work' and the NET result to each party, but when properly utilized, concessions offer buyers incentives, and sellers huge space for compromise. 

In a nut shell, a seller concession is usually a percentage of the sales price or fixed dollar amount, that the seller contributes towards the buyers expenses (closing costs, pre-paids or interest rate buy down) that can essentially be financed. Typically 2-3% but on certain property types and lending programs as high as 6-9%!* 

So for example:

Listing price is $105k and the seller receives an offer for a $100k Sales Price with a 3% seller concession. 

This means that the the sales price will be $100k WITH 97% of $100k, OR $97k is DUE SELLER.

HOWEVER, the buyer's financing is based on the SALES price. So..let's say buyer A is putting 10% down. 10% of what? $100k (The sales price) OR $10k down. The loan amount will be based on 90% of the $100k sales price. Or a Loan Amount of $90k.

So where does the 3% of $100k go? Toward's the buyer's closing costs. Usually towards title charges, prepaids (taxes and insurance), loan costs or prepaid interest in the form of an interest rate buy down. 

Hopefully it's clear why a buyer would do this, they want to reduce the cash to close or capital investment. By financing the costs of the transactions buyers or investors can keep their capital requirements closer to the true down payment percentage of their loan terms. In this example instead of being closer to 13-14-15% of $100k, the buyer would likely be at a true 10% down. 

Why would a seller do this? Because if the property has not sold at or over asking for sometime.. it's probably not going to. Most sellers are somewhat negotiable within reason. If a property priced at $105k has been on the market or maybe had a price reduction already, what's it going to sell for? If the net result is $97k to seller, what do they care how much the buyer is financing? It's their money, let them do what they want with it. 

There are reasons buyers would not or cannot take this option, For example they could just offer a more aggressive offer, at a lower sales price, but some concessions MUST be seller paid. 

Some seller concessions may not be in the best interest of the seller..for example if there are multiple equivalent strong or cash offers and do not include a seller concession, apples to apples and net result to seller, I would advise a seller to accept the offer with no concession. Why? Appraisals.

 A property still needs to appraise for the sales price, not the loan amount. So if from our previous example, the property only appraises for $98k, our concession was based on a percentage (3%) of the sales price. Loan amounts are ALWAYS based on the LESSER of the sales price OR appraised value. In the case of a reduced appraisal valuation,  97% of $98k is $95,060 DUE SELLER. So if nothing were to change, the net result to the seller would be the difference between the initial $97K DUE SELLER less $95,060 OR $1,940. Now, there is always room for negotiation. One can potentially reduce the concession, depending on circumstances, but remember our original listing price was $105k, if the appraisal came in low.. it's because that's what the property is likely worth. 

Seller receives $95k (less RE commissions and seller closing costs) instead of full appraised value (in most markets actual sold at 97% of appraised value would be within reason and common) but ALSO the hard work is done and sellers can access the capital in a few days or weeks. What's the incentive for the seller? Just that. Opportunity cost. 

Someone wants to buy your asset. Make them a deal and get it sold. I don't understand this apprehension to creative negotiations and buyers and sellers treating any property like the Taj Mahal. You don't hear these wholesalers preaching all over this site preaching about how great the property is (usually the opposite.) They're talking about how great the DEAL IS. Usually not for the seller. 

This is one way that the seller can help dictate terms. It's almost like, "ZERO DOWN" for a car. A seller concession doesn't always mean the seller receives lower than the asking price. A buyer could offer $108,250 with 3% concession. Or 97% of $108,250, equivalent to $105,002 DUE SELLER. Assuming the property will appraise, to reiterate, it's the buyer's money. 

We're talking small percentages of the banks money. There are billion dollar deals getting done every day. We're spending days negotiating over fractional transactional costs on your 1978 property listing that has a dozen problems that nobody wants to deal with. SELL IT. Move on. Reinvest. Upgrade. Your seller is already up 300% in 12 years (not including rental income or usage) lol But really.. most negotiations fall apart even before due diligence, if there is a potential problem in the deal, the appraiser, lender, inspector, insurer, brokers or market will point it out and provide clarity on the primary variables during contingency.   

The point is, concessions provide additional options or middle ground for compromise. Options are good for buyers and a seller willing to offer a healthy concession is likely to have more buyers consider their property as an option.

Make cents? Then it can make $$$. On larger transactions sellers can also consider excluding commissions on the concession portion. Be sure to discuss all elements with your Realtor. All parties would need to likely agree. 

Professionally 2/3 of my current closings are utilizing a concession in some form or fashion: 

- One was a 3% concession towards primarily a 2/1 interest rate buy down. This is a required seller paid concession that typically runs in the 2.125-2.375% range of the sales price. It is not available on all property types but I believe primaries and second homes are eligible. It effectively reduces the buyers payment to 2% below the note rate year 1 and 1% below the note rate year 2. In other words instead of payments based on let's say; 6.75%, for the first twelve payments they are based on 4.75% and the next twelve payments at 5.75%. Year three (if the buyer has not sold or refinanced) the payments would be based at the note rate of 6.75%. To achieve this the lender essentially charges the interest up front, or the total in the difference in interest payment for first twenty four months at closing. They financed this amount (higher loan amount) and any non utilized portion is reduced from the principal balance. The property appraised above the agreed asking price and closes in July. 

- The second was a 2% concession at closing towards closing costs. At a purchase price of $300k+, this was $6k+ that a first time homebuyer didn't have to come up with. Similar to a car loan, a few dollars a month can go a long way towards making an investment work. Closing costs  this young man can use to installing his dream flooring. The seller received full asking price and a net amount (98%) that was likely above what they would have otherwise received..The owner had a tenant that was moving out. The Property appraised. And it closes the day after the tenant vacates. What is the cost of the owner having the property vacant and on the market a few more months, or longer? Opportunity costs. Closes Tuesday. 

There are cautions to concessions, in that buyers are still paying 'for it' one way or another. Those few dollars a month add up to a lot in the long run. It's essential to have a GREAT lender that can walk you through options and explain the advantages and costs of each option. 

Also, concessions can often make an offer less appealing to a seller (mainly because they haven't read this article) BUT also because it's a difficult concept to grasp (the true professionals in the lending community deserve a lot more credit and recognition than they get!) I joke that mortgage pros get all the tough but none of the love. I guess we sort of deserve it (I was a licensed broker for far too many years..mainly from 2004-2011 (I worked with a guy/mentor? that worked very closely with Jordan Belfort..let's just leave it at that..) but when you find a GREAT lender, keep them close! And ask them to better explain the mechanics than I or to provide loan estimates with and without seller paid concessions.  

Anyway, a seller concession can theoretically make your offer less attractive but with a clear understanding and presentation there is generally a way to account for one or at least a portion without adversely effecting the likelihood of a positive transactional outcome. I have not had a problem getting an executed offer that incorporated a seller concession closed. 

PRO TIP for stagnate properties or coming to market soon a seller can publicly offer a credit for a property (that is likely to appraise.) In coordination with a pre approved lender, this is one way to drive eyes and foot traffic with an incentive that displays seller consideration. Rates are high (well maybe not historically) but at least on the Oregon Coast, valuations are also heading higher.

So particularly on higher valued properties where high 6-7%'s can be disincentivizing for investors or for sellers in an area that might be softening, these are useful and meaningful tools to move the needle. 

Consult with your Realest Realtor and your Leading Lender. DM for references. These are tough concepts that I myself am still mastering, clearly..feel free to proof check or provide alternative perspective(s).  

Any creative concessions or innovative solutions you've utilized for yourself or buyers or sellers recently? This is a safe space. Share away. Always learning..

Cheers.