When you’re buying or selling a home in Brooklyn, you might come across the term “seller concession.” What does it mean, and how can it impact your mortgage payment? If you’re selling, how can impact your sale and/or net profit? In this blog post, we’ll explore what sellers concessions are, how they work, and the pros and cons of using them here in Brooklyn.
What are Sellers Concessions?
Seller concessions are a way for home buyers to ask the seller to contribute money towards their closing costs via an increase in their loan amount. Closing costs are the fees that are associated with buying a home, such as appraisal fees, title insurance, property taxes, points, etc. Here in Brooklyn, they typically range from 4% to 5% of the total loan amount.
How do Sellers Concessions Work?
When a home buyer asks for a seller concession, they’re essentially asking the seller to help them pay for their closing costs. Let’s say the closing costs for a home are $30,000, then the buyer might ask the seller to contribute $20,000 towards those costs in the form of a seller concession.
The seller can agree to the buyers’ request for a seller concession by either lowering the purchase price of the home or by giving the buyer a credit towards their closing costs (i.e. raising the purchase price).
For example, let’s say that a buyer makes an offer on a house for $700K and that price includes a 3% seller concession. The offer might read something like this, “Our offer is $700K with 20% down payment, and includes a 3% seller concession.” That means that the offer is essentially $679K because the $21K seller concession will be used by the buyer to pay for closing costs and as a result, the seller does not see any of it. Their net would be based on the price after the concession (i.e. $700K – $21K).
The seller can counter back and say “we accept your offer of $700K, but we do not agree to the seller concession request.” The seller can then say, “If you would like a seller concession, we are happy to offer that to you, but it would need to be added on top of the $700K. So in this scenario, the new purchase price would be $721K and the net to the seller would be based on the $700K.
Ultimately, the way that the seller concession is handled is subject to negotiations between buyer and seller but the overall purpose of it is typically to help the buyer pay for closing costs or buy discount points on the rate. The amount of sellers concessions allowed varies depending on the type of loan and the location of the property.
How do Sellers Concessions Impact Your Mortgage Payment?
Sellers concessions can have a significant impact on your mortgage payment. If the seller agrees to contribute money towards your closing costs, you’ll have less money that you need to bring to the closing table. This means that you’ll have a lower upfront cost, which can make it easier to buy a home.
However, it’s important to note that sellers concessions can also increase your monthly mortgage payment. This is because the amount of money that the seller contributes towards your closing costs is added to your mortgage. So, while you might have a lower upfront cost, you’ll end up paying more over the life of your mortgage.
Where are Sellers Concessions Most Common?
Sellers concessions are most common in buyer’s markets, where there are more homes for sale than there are buyers. In these markets, sellers may be more willing to negotiate on price and closing costs in order to sell their property.
Sellers concessions are also more common with certain types of loans, such as FHA loans and or lower down payment loans. For your reference, FHA loans allow sellers to contribute up to 6% of the purchase price towards the buyer’s closing costs.
As you can imagine, in areas where FHA loans and lower down payment loans are more common, you can safely assume that seller concessions are likely more common as well. And on the flip side, in areas where FHA or lower down payment loans are not common, it may be harder to negotiate a seller concession because they may not be as common there.
Pros and Cons of Using Seller Concessions
There are both pros and cons to using seller concessions when buying a home. Some of the pros include:
- – Lower upfront costs: By asking the seller to contribute towards your closing costs, you’ll have less money that you need to bring to the closing table.
- – Easier to qualify for a loan: If you don’t have enough money saved up for closing costs, sellers concessions can make it easier for you to qualify for a loan.
- – More negotiating power: If the seller is motivated to sell their home, they may be more willing to agree to your request for sellers concessions.
- – For sellers, the main pro is that you can offer this as a tool or incentive to get your property sold. It doesn’t benefit you directly, but it can help make your property more attractive, or it can help you seal the deal when you’re negotiating with a buyer.
However, there are also some cons to using seller concessions:
- – Higher monthly mortgage payment: Sellers concessions can increase your monthly mortgage payment, which can be difficult to afford over the life of your mortgage.
- – Higher total cost of the home: By adding the seller’s contributions to your mortgage, you’ll end up paying more over the life of your mortgage than you would if you paid for the closing costs upfront.
- – Potentially less attractive offer: If you ask for too much in sellers concessions, your offer may be less attractive to the seller, who may choose to accept a different offer instead.
- – For sellers, the main con is that when you allow a buyer to do a seller concession, the property then has to appraise for the total purchase (with seller concession included). If the price with concession is above the comps in the area, you can run the risk of a low appraisal which can possibly jeopardize the deal. If you agree to a seller concession, make sure that there are plenty of comps to justify the new price with seller concession included.
In conclusion, sellers concessions can be a useful tool for home buyers and sellers, but they’re not right for everyone. If you do intend to get a seller concession or consider accepting an offer with a seller concession, make sure you analyze all the pros & cons in order to make sure it makes sense for you and your personal situation.
If you have any questions about seller concessions and how they’re handled here in Brooklyn, feel free to Contact Us anytime 🙂