You’re trying to buy a house. You love it, but it has this horrifying orange wallpaper—everywhere.
What can you do?
You can ask the seller for a “concession” of $2,000 to strip off that terrible wallpaper. While that doesn’t fix the problem immediately, it goes a long way to making you feel like you’re getting what you want.
Let’s look at what a seller concession is, how it works, and how it can benefit both buyers and sellers.
The Basics of a Seller Concession
In a real estate transaction, a “concession” is anything that the seller gives up to help make the deal more attractive to the buyer. Concessions are not required, but both buyers and sellers can use them as.
Seller concessions can take many different forms, but they all essentially boil down to three things:
- Fixing up the property before closing
- Paying for the buyer’s closing costs
- Providing financial incentives to the buyer
Each can help make a deal more attractive to a buyer, but they all come at a cost to the seller.
It’s important to remember that seller concessions are not required. If you’re buying a home and the seller isn’t offering any concessions, that doesn’t mean the deal is off. It simply means that you’ll have to pay more out-of-pocket costs at closing.
People get used to tons and tons of concessions during a buyer’s market. They expect that the seller will pick up all their closing costs and that it will be easy to negotiate seller contributions for repairs.
“My aunt had the seller pay off their entire closing costs.”
“Last time I bought a house, I got a $10,000 credit for new appliances.”
But during a seller’s market, a seller has no reason to offer concessions—unless, for some reason, they really need this particular deal to go through.
Real estate agents in hot markets are aware of this and will only advise you to push for a seller’s concession if they think it will be possible.
What’s Included in Seller Concessions?
Now that you know what seller concessions are, let’s take a look at the three most common types of concessions:
1. Fixing up the property before closing
This is probably the most common type of concession, especially if any obvious repairs need to be made.
For example, say you’re buying a home that was built in the 1970s. The roof clearly had to be replaced years ago. You could ask the seller to replace the roof before you buy the house.
Alternatively, a home inspection could find repairs that are actually necessary for the loan type to go through. If the seller isn’t willing to make those repairs, the home buyer can walk away from the home purchase free and clear (provided they had an inspection contingency).
2. Paying for the buyer’s closing costs
Closing costs can add up quickly—they’re typically around 2-5% of the home’s purchase price. Your real estate agent might write an offer that increases the house’s sales price but decreases your closing costs; that doesn’t take too much out of the seller but adjusts things favorably for you.
Do note that you’re rolling the closing costs into your home loan if you do this. You can potentially do this without a seller’s contribution (by talking to your lender), but either way, it will make your home loan payment less affordable.
3. Providing financial incentives to the buyer
This is less common, but it does happen. Sometimes, a seller might offer a buyer a credit that can be used for things like appliances or furniture.
This is essentially the same as offering a concession for fixing up the property; it just comes in the form of a check instead of actual work being done. Specifically, it’s money that will be due to the buyer after the home loan has been funded and when escrow is being closed.
Now, if a property needs dire updates, it’s more likely that a seller will provide concessions. But if a property is getting competing offers, it’s less likely that a seller will even entertain the idea.
Should You Offer Concessions as a Seller?
If you’re selling your home, you might be wondering if you should offer concessions to buyers. The answer is—maybe.
The key is to talk to your real estate agent about the market conditions in your area and what they recommend. If you’re in a buyer’s market, it might behoove you to offer some concessions to get more buyers interested.
For instance, during an open house, you say you’re willing to offer concessions for new appliances. You could get competing bids or even start a bidding war by making the home more attractive.
But if you’re in a seller’s market, you might not need to offer anything extra; buyers will be eager to buy your home as-is.
The bottom line is that you should always talk to your real estate agent about whether or not offering concessions is a good idea.
When Should You Push for Concessions as a Buyer?
If you’re buying a home, you might be wondering when the best time is to ask for concessions. But, again, it depends. It comes down to how badly you want the house and what kind of market conditions you’re dealing with.
If you’re in a buyers market and there are tons of houses on the market, you might not need to ask for anything extra. The seller is likely already feeling pressure to sell and may be more willing to negotiate on price or repairs.
But if you can even find a market like that today, you’re already set.
If you’re in a seller’s market and there are very few houses on the market, you might want to think twice about asking for concessions. Rather, think about things in terms of whether they’re a deal-breaker or not.
Is it a deal-breaker that the house needs a new roof, appliances, or wallpaper? If the answer is yes, it’s worth it to negotiate a concession. But if it will ultimately get rolled into the cost of the loan (by increasing the value of the property), consider that you might just be spending more money in the long run.
You might want to consider one more thing: If you can’t buy the house without the concession.
If something fundamentally changes about the property and your loan, and you need that concession to buy the house, you have little choice except to ask for the concession or walk away.
For example, a house might fail to fund through a USDA loan, FHA loan, or VA loan. Now you need a conventional loan, which costs more in terms of down payment. To get this loan to go through, the seller might give you a financial concession toward your closing costs to give you more cash to spend.
Alternatively, you may find that you need a VA loan to qualify. The seller could give you closing costs concessions to pay for the VA funding fee.
It’s not unheard of for even the real estate agents to throw in some money in this situation to make sure that the deal will close. But this generally happens when the buyer’s closing cost has gone up through no fault of their own. If the buyer tanked their credit score, they are probably out of luck.
Hot Markets and Aggressive Concessions
Now, there is something else we’ve seen lately. People are getting priced out of the market, so they’re bidding very high on properties. Frequently higher than they want to.
Then, when they get the home inspection report, they try to hammer the price down through concessions.
It’s a kind of unfortunate trick. If the buyer intends to do this from the outset, it’s bad practice and bad faith. But it’s easy to see why buyers would be pushed in this direction when having to pay so much more than they expected.
Sellers should be aware that many buyers will overbid by $10,000 and then try to recover that $10,000 during the home inspections through concessions. At the same time, buyers should be aware that sellers (specifically, their agents) are becoming pretty savvy about this and won’t just fold.
It’s better to bid what you want and be realistic about the concessions you’ll receive in return. And as a seller, if someone is asking for too many concessions, it’s fine to say no. While they may walk away from the deal, you could also find someone willing to pay the same amount without those concessions.
Bank Limitations on Seller’s Concessions
Keep in mind that some banks and lending products limit the number of seller’s concessions that a buyer can ask for.
Let’s say the lender limits it to six percent. So if you’re buying a $200,000 house, the most you could ask for in terms of seller’s concessions is $12,000.
Asking for more than that could jeopardize your loan approval.
So when you’re negotiating for concessions, make sure you know the limitations of your loan product and don’t ask for more than you’re allowed. Your lender will give you a head’s up if your contract won’t be able to close.
Are There Any Tax Consequences for a Seller’s Concession?
Generally, there are no real tax consequences involved. But you should talk to your tax accountant.
As a seller, you may walk away with less money. And that could impact how much you owe in taxes, although most people selling their primary residence won’t need to pay taxes on their sale.
As a buyer, you could walk away with something of value, such as a new appliance. But most of these things are established within the scope of purchasing the home, e.g., you are paying a total amount for the complete package.
Seller’s concessions can make a deal more attractive. But it’s important to know when and how to ask for them.
If you’re buying a home, talk to your real estate agent about whether or not arguing for concessions is a good idea in your market.
And if you’re selling a home, be aware that buyers might try to lowball you by asking for too many concessions. It’s up to you whether or not you want to give in.
How does a selling concession work?
A selling concession is an extra expense that the seller agrees to pay on behalf of the buyer. Usually, this is something that the buyer would otherwise have to pay for, like closing costs or repairs.
How do you calculate maximum seller concessions?
The maximum amount of seller concessions is typically equal to six percent of the home’s purchase price. But this can vary based on lender and loan product, so check on your lender’s requirements in advance.
What kind of repairs can be seller concessions?
Some common examples of repairs that could be seller concessions include fixing a leaky roof, replacing old appliances, or repairing damage from a previous pest infestation.
What does it mean when a buyer asks for concessions?
When a buyer asks for concessions, they ask the seller to agree to pay for something that the buyer would otherwise have to pay for. This could be anything from closing costs to repairs. The buyer is essentially asking the seller to help them out financially or increase the property’s value to them.
How do appraisers adjust for seller concessions?
Appraisers typically adjust for seller concessions by factoring them into the property’s overall value. So if a property is appraised at $100,000 and the seller has agreed to pay $5,000 in repairs, the appraiser would likely factor that $5,000 into the property’s value.