What is a Sellers Concession and Top 3 Ways to Use it When Purchasing a Home

What is a seller's concession and what does it mean? And how a buyer can use this to their benefit. 

So let’s get into what a seller's concession means. 

In most markets, the term seller's concession is the seller contributing towards the buyer's closing costs or any other pre- paid items related to the real estate transaction. This is coming from the sellers proceeds at the closing. So for example if the buyer's closing cost is $10k, the seller will pay those costs for the buyer or may contribute to a % of that cost. 

Things are a little different in my market and the term seller's concession has a very different meaning. What I just explained regarding what a seller's concession is in other markets, would be considered a seller credit in my market. 

In my market the term, a seller's concession basically means that the seller is allowing the buyer to borrow more money in order to pay closing costs or any other costs related to the closing. It could be extra yrs of HOA, or a 1% luxury tax that is paid on any purchase over 1 million dollars in NJ. So in this scenario the seller wouldn’t be paying for this. The bank would be paying for this by wrapping it into the mortgage amount which is being borrowed by the buyer. 

An example of this would be if you were buying a home for $400,000, we would buy it for $410,000 and the extra $10,000 would be used toward closing cost or any other prepaid items. The seller would have to allow us to do this of course. 

Here are the top 3 best uses for a seller's concession and why it’s good for a buyer to possibly take this route. 

1. This would pay your closing cost which covers your title work, attorney fees, escrowed taxes or any other fees involved with closing.
2. If you’re buying a home that is over 1m you can use it to cover the 1% NJ  luxury sales tax that’s taken at the closing. 
3. Depending on the bank, we can also use it to potentially pay a yr or more of HOA fees up front. 

The reason this can be a great option for buyers is that it would allow for some cash flow when moving into your new home. This can free up some money to buy furniture, blinds or any upgrades you would like to do before moving in. Borrowing an extra $10 or $15k from the lender is cheaper than paying this fee at closing. For example It will cost you approximately $50 a month in your mortgage payment to borrow $10,000. So whether you just don’t have enough money for closing costs or want to have some cash flow, this is a great option for all buyers. 

On the flip side to this, there are some rules that will be in place when adding a seller's concession to a deal that you need to understand. Remember, the seller is allowing this for the buyer to benefit, so the seller should not get penalized. There will be language in the agreement that the home must appraise at the price the seller is actually netting. So if they are netting $400k on the sale and you're buying at $410k, as far as they are concerned the home needs to appraise at a minimum of $400k. 

What this means is anything above $400k up to $410k is for the benefit of the buyer. If it appraises for 410k then the buyer will have the seller's concession they wanted in full. If it appraises for $405k the buyer will only have $5k toward the closing costs. With this agreement in place, the seller isn’t responsible for the under Appraisal below $410k and up to $400k. There will be no renegotiating the price. The only time there would be consideration to renegotiate the price is if the home appraises under $400k. This agreement would be done by the attorneys during the attorney review period. 

Hope this helps clear up any confusion of what a sellers concession is and if you have any questions please feel free to contact me anytime!