A concession is a discount or incentive which is offered during a real estate transaction. Some sellers offer concessions to provide an incentive to encourage buyers to purchase their home. Concessions are paid for by the seller, as they benefit the buyer in ways that may be more appealing than possibly, being able to purchase the home for a lower price.
Sometimes, buyers have good income, credit and even the down payment required to purchase a home – but that doesn’t mean they necessarily have enough cash reserves to pay their closing costs. There could also be a feature in the home the buyer wants to replace but afford to do so themselves. These can be concessions. If the seller agrees to make that improvement, it could cause the buyer to act favorably.
Another example is paying the buyer’s closing costs, buying down the interest rate, or any possible combination of physical improvements or upgrades to the property.
Sometimes, sellers might question why they should provide concessions to a buyer. That should be quite obvious – it improves the marketability of the home! In today’s market, with the less than normal number of homes on the market, it may appear that the seller has the advantage and may not need to offer concessions.
Let’s face it – today’s market is different. Way different than even just 10 years ago. The decreasing number of sales and increased days on the market are resulting from a smaller than normal pool of buyers. Interest rates have more than doubled in 2022 which has made houses less affordable. Buyers who qualified last year but couldn’t find a home to buy, may be able to find a home today but their debt-to-income ratio has increased significantly, causing them to qualify for smaller mortgages.
Many buyers, especially those in lower price-ranged homes, simply can’t afford to put more money down – plus human nature tends to discourage them from considering a smaller home. For that reason, they are forced out of the market until rates come down.
Due to this issue, and in an attempt to counteract it, many sellers are willing to consider making concessions. It’s something that builders have successfully used for years to sell their inventory without lowering prices. Plus, it will have a direct impact on comparable sales which affects appraisals.
Concessions can take on different forms. A seller could offer to pay the buyer’s closing costs or pay points for the buyer to get an FHA or VA loan. Another option would be to pay for a 2/1 buydown that would lower the buyer’s payments in the first two years of the mortgage.
Any number of improvements could be offered to the buyer like appliances, floor covering, countertops, roof, fence, etc.
Most times, these would be included in the listing agreement and promoted in the listing description through MLS and other public media. When a sales contract is written, it needs to be included so that there is no misunderstanding between the parties and that the lender is completely aware of the concessions.
You’ll want to avoid possible disputes – and to do so it’s quite recommended that a dollar limit is attached to the concession. For instance, “Seller to pay up to 3% of the sales price in buyer’s financing concessions” or “Seller to escrow up to $5,000 for appliances at buyer’s discretion.”
In the past fifteen years, concessions really haven’t been used much. Changing times however have caused different methods to be used in order to be successful. Sellers can offer concessions and buyers can ask sellers to make concessions in the purchase agreement.
If your agent is not familiar with concessions, it may be that they have never used them before. They are commonplace and legal, within limits, if they are disclosed. The benefit is that concessions can improve marketability of a home and put a transaction together between parties that would not be possible otherwise.
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