A buyer asked me the other day, “What is a ‘seller concession’?” and as I explained this, I realized that there seems to be a lot of confusion about what a seller concession actually is. There are always questions concerning how it works, who pays for it, and how it affects both the buyer and seller. Let me explain it in a couple of simple ways to make sure that you, the buyer or the homeowner or seller, can understand it from all perspectives.
When a buyer puts in an offer on a house, suppose they offer the asking price (or whatever they’ve agreed upon), a buyer then is going to have a variety of closing costs somewhere in the neighborhood of $4,000 to $6,000 depending on which market or area one is in. Generally speaking, most closing costs in Greater Boston or in the Massachusetts area as a whole do not exceed $5,000. As a rule of thumb, we usually increase our offer by $5,000. For instance, let’s say we wanted to offer on a house that is $300,000, but we wanted to roll in our closing cost to the final cost of the mortgage. This means we would bring $5,000 less money to the table at the closing. Now, all the buyer would really be responsible for is their FHA (Federal Housing Administration loan) 3.5% down or their conventional money down. On a $300,000 house, we are going to roll in our $5,000 on closing costs, thus making the purchase price $305,000. What the seller agrees to do is accept the larger amount, so it shows up as a credit back to the buyer on the closing statement at the time of closing. The seller will agree to sell the house for $305,000, give a credit back to the buyer of $5,000 that the seller typically pays commission, tax, and any proration on the $300,000, not the $305,000. But the buyer will then finance the $305,000 and their monthly mortgage payment with principal and interest. All that is based on the $305,000. In essence, you are basically borrowing $5,000 on top of whatever your stated purchase price is and the seller is really acting as a pass through to agree on the higher amount, but then obviously take the lesser amount paying tax, commission, and the other applicable prorated items on that lesser amount.
Seller concession does not affect the seller in anyway because the buyer is really financing. It’s a little confusing as some people tend to assume that the seller is paying the money, but it does not end up that way because the buyer ends up financing at the $305,000 so their payment is based on the $305,000. The seller pays tax on commission, most times on the $300,000. It doesn’t really affect the seller in any way; the bottom line is that it is just allowing the numbers in the paper trail to match up with how a buyer can get their closing cost rolled into their mortgage. They are basically going to finance $5,000 more over the life of the loan. If it is a $300,000 loan then that does not amount to very much per month. It makes more sense for the buyer to hold that $5,000 in cash as opposed to paying fees in closing cost of which they might not get back. With the interest rates at a low rate right now and having been at a low rate, it makes a lot of sense to keep that $5,000 in your pocket than roll it into your mortgage payment, it is not going to up your mortgage payment but a mere few dollars and most buyers tend to appreciate having that cash for when they move into the house.
This free eGuide will answer many of your questions and likely bring up a few things you didn’t even know you should consider when buying a home.