When buying or selling a home, negotiations often go beyond the purchase price, factoring in repairs, timeline, and fixtures, to name a few.

One tool that can impact the final deal is seller concessions. These can make a home more affordable for buyers while also helping sellers close the deal more quickly. Understanding the nuances behind them can empower both parties to negotiate more effectively and achieve a mutually advantageous outcome.

What are seller concessions?

Seller concessions refer to costs that the seller agrees to cover on behalf of the buyer. These are typically used to help the latter reduce any up-front expenses that may balloon their budget, including loan origination fees, appraisal costs, title insurance, prepaid property taxes, and even attorney or agent compensation. The seller can decide to offer concessions on their listing as a way to attract attention, or they may be brought up by the buyer during negotiations. Either way, they are only binding once they are put to paper in the purchase agreement or other contract.

How much can a seller offer in concessions?

Concessions are typically written as a dollar amount, and the max amount depends on the type of loan the buyer is using. For instance, FHA and USDA loans allow up to 6 percent of the purchase price and VA loans up to 4 percent. Conventional loans, meanwhile, also factor in the size of the down payment: individuals with one of less than 10 percent may generally have seller concessions up to 3 to 6 percent, but those with a higher one may be eligible for up to 9 percent. Also note that some states may place limits on concessions, so be sure to check the regulations in your area.

Understanding these limits is crucial for both buyers and sellers since exceeding the permitted amount could complicate the mortgage approval process. A real estate agent or mortgage lender can help clarify what is permissible for a given transaction.

Pros and cons

Like any negotiation tool, seller concessions have advantages and drawbacks for both buyers and sellers. For buyers, the primary advantage is the reduction in up-front costs, which can make homeownership more accessible. This is particularly helpful for first-time buyers who may not have substantial savings. Additionally, concessions can allow them to allocate more of their savings toward home improvements or emergency reserves.

However, there are potential downsides. If a seller agrees to cover a significant portion of closing costs, they may offset this by raising the home’s purchase price, impacting the buyer’s long-term mortgage payments. And in a competitive seller’s market, buyers who request concessions may find their offers getting passed over in favor of those without such requests.

As for sellers, concessions can be both a viable marketing and negotiation tool. In a buyer’s market where inventory is high, a seller may offer them to incentivize buyers, making their home stand out among comparable listings. Such an approach can also be effective if the property has been on the market for an extended period. In turn, concessions may help speed up the sales process if a buyer seems to be on the fence. The main caveat, though, is that covering costs for the buyer reduces a seller’s net proceeds from the sale, which can put them in a bind if they have little room to negotiate on the purchase price to compensate.

When used strategically, seller concessions are a valuable tool that can benefit both buyers and sellers. The key is to assess the market conditions and financial flexibility of both parties before making concessions part of the negotiation. If you’re considering using seller concessions in your home transaction, reach out to a knowledgeable real estate professional, who can work with you to determine if it’s right for your situation and help ensure the best outcome.