A seller concession is an expense that the seller covers on the part of the buyer. These are things that the seller may not be obligated to pay for, but they will choose to cover of their own accord.
What’s Covered by Seller Concession?
Seller concessions can cover just about anything. If the seller wants to pay for a new set of garden gnomes in the front yard, then that could be considered a seller concession. Of course, the list of things that might typically be covered under under seller concession would be comprised of closing costs, which would include following:
- Title insurance
- Origination fees
- Loan processing fees
- Transfer taxes
When a buyer is able to make their monthly payments but may have to stretch in order to come up with the initial purchase costs, a seller will sometimes pay the buyer back their down payment through a gift assistance program. Other costs can be covered by the seller, as well, including remodeling, carpet cleaning, landscaping and so on. Typically these are costs covered well before the purchase, or even before it goes on the market. But there may be scenarios where the buyer signs the papers on the understanding that the seller will, for instance, pay for some work to be done on the home.
Why Do Sellers Make Concessions?
Seller concessions feel counter-intuitive. The seller is the one who’s supposed to collect the checks, and the buyer is supposed to be the one paying for the home. So why is the seller paying for anything that they don’t technically have to pay for?
There are a lot of reasons a seller might make some concessions. Maybe they can get a good deal, maybe their accountant is a genius at bringing the costs down. Maybe they just like the buyer and will do whatever it takes to sign the home over to them. More often than not, however, it’s simply a matter of speed.
If the seller is willing to wait, then certainly they can eventually find someone who is willing to buy the home at the listed price and pay for all the closing costs. It could take months for this to happen, or even years.
The decision to cover closing costs is usually made when, for instance, a buyer has steady income, can cover the mortgage payments, but they may be relatively cash poor. They could save up and come back in a year with all the money required to cover the down payment, closing costs and so on, or the seller could cover it right now and they can finish the deal by the end of the week.
A lot can happen over the course of a year. The buyer might lose interest, they might find a home they like better. Or once they have their cash in hand, they might be able to move into the home that was their first choice all along.
A seller may cover closing costs in order to give their home just a little more edge over the competition. If a buyer is looking at two different homes that are more or less equally appealing, in the same neighborhood, both beautifully maintained and reasonably priced, the buyer may be quick to choose the home that won’t have them paying for inspection fees themselves.
Do Seller Concessions Cover 100% Of The Closing Costs?
As mentioned above, some sellers pay buyers their down payment back in order to ease the financial burden on the buyer, hasten the buying process, and ensure that the buyer has a little breathing room so that they’re not struggling to make the monthly mortgage payments. This down payment can be used to cover the remaining closing costs not covered by seller concessions. However, there are some costs that the seller cannot easily cover directly.
Certain fees like credit report costs and insurance are difficult for a seller to try to cover on behalf of the buyer. Generally, the above-listed costs are the only ones that a seller will cover directly through concession.
A seller won’t always offer to cover all of these costs, anyway. Seller concessions could take the bulk of the closing costs, or they could only cover one or two of the expenses involved with making the sale.
What Will Seller Concessions Cost The Seller?
Generally, it is advised that a seller provides roughly six percent of the list price in order to cover closing costs. This will generally cover all of the fees and taxes that seller concession is expected to provide for. Six percent is just a general guideline, though, not a set-in-stone rule.
At the low end, seller concessions may be more like two percent of the home’s cost. At the higher end, the number may be closer to eight percent. It’s not unheard of for concession costs to fall well outside of this range, either, at one percent or nine, ten or higher. Certainly there are sales where the home goes for a fairly low number and the closing costs wind up being one of the larger expenses involved in the trade.
Should I Negotiate For Seller Concession?
Seller concession is nice when it’s offered, but it might not be a necessity. You will need to weigh it in with all of the other factors that will help you determine which home to buy, how much you’re able to spend and so on.
There are scenarios where you will definitely want to negotiate for seller concession. For instance, if your final decision is going to be a toss-up between home A and home B, then you may want to talk to the sellers about concession. If one of them is willing to cover the closing costs or at least meet you halfway on them, then that can be the tiebreaker that will help you to decide.
If seller concession is offered, it’s worth taking, and if it’s not offered, it’s worth asking about. Rare is the home seller who’s going to send you away and refuse to deal with you because you asked about sharing the closing costs. Most of them are happy to make the sale, and even if they can’t help you with closing costs, they’re not going to hold a grudge because you asked.
You only need to hold out for seller concession when you simply don’t have the cash on hand to cover all of the closing costs yourself. You may find yourself in a scenario where home A is much pricier than home B, with all other things being equal. And maybe home A is pricier even with seller concession. In this case, you’re still better off going for home B. Seller concession is nice but if the home is still going to cost you more than you’d like to spend, then it’s not much more than a token gesture.
What Will Closing Costs Run Me Without Concession?
The average closing cost to the buyer is $3,700 according to various studies. The cost is estimated to be between two and five percent of the list price for most homeowners. Note that this is just ballpark figures. If you’re buying a luxury home, your closing costs could ultimately be a smaller percentage than a high-end list price, but two percent of a million and a half is quite a bit more money than five percent of two hundred thousand.
In more cases than not, you can expect the buyer and seller to split the difference to some extent. You might get hit with the entire bill for closing costs on your end, but it’s unlikely. Sellers want to make the sale, and if they’re stubborn about concessions then they’re going to wind up sitting on the property for a lot longer than they’d like.
Closing costs may include:
- Application fee. This is the fee for your lender when they process your application.
- Appraisal. Paid to the appraisal company to determine at what price the property can be fairly valued.
- Attorney fees. Not required in every state, but it’s not a bad idea to have a lawyer go over the papers before you sign.
- Closing or Escrow fee. Paid to the title company, attorney or escrow company to oversee the closing.
- Courier fees. Transporting documents via courier is quicker and safer than US mail, but pricier, too.
- Credit report. This is one you may have to cover on your own.
- Escrow deposit for property taxes and mortgage insurance.
- Flood determination or the life of loan coverage. This is not the insurance itself, just the cost to have someone come take a look and see what your risks are.
- Inspection. This is one that a seller will often volunteer to cover, though you may want to have an inspection of your own conducted.
- HOA transfer fees.
- Insurance. The first year’s insurance is usually paid for upon closing, and some sellers are willing to foot the bill on this one.
- Pest Inspection.
- Origination fee. Origination fees cover the lender’s administrative costs, usually to the tune of one percent of the loan cost.
- Property taxes.
- Land record fees.
- Survey fees.
- Transfer taxes.
- Underwriting Fee. This goes to cover your lender’s work in determining your eligibility for a loan.
- VA funding fee. You may wind up including this fee in the loan itself, in which case you won’t have to worry about it at the closing time since you’ll already be covered by your lender.
Can I Bring the Costs Down?
You’ll want to do your negotiating along the way. A few days before closing, your lender is going to get a Closing Disclosure statement to you, which will outline the closing fees. If you’re not happy with the terms, you may have the option of walking away, but renegotiating at this point will be tricky. Many fees are negotiable or unnecessary, but when a lender brings them up, the buyer may simply assume they’re a necessity. Ask about every fee that’s being added into your loan along the way and make sure that you’re happy with the terms before you commit.
Some lenders will offer no-closing-cost mortgages, but the tradeoff is that you’re going to pay more in the long run. You’re typically looking at bigger monthly payments and a significantly increased total cost, as the lender is generally going to be putting all of the fees and costs right into the mortgage itself, and charging a higher rate of interest overall.
The more capital you have going into a sale, the more leverage you have in the whole deal. If you can afford to pay your share of the closing costs up front, then you can avoid spending more in the long run. If you have the funds to move into the home of your choice, then seller concession is a nice bonus, but it won’t make you vulnerable to sellers looking to capitalize on your desperation.
Plan, ask a lot of questions and make sure that you know what’s going on every step of the way through the closing process.