It was John and Mary’s dream to buy their first home—a cozy three-bedroom house in a quiet neighborhood. But as they sat with their real estate agent, reviewing the numbers, they realized they were still a bit short on closing costs. Just when they thought they might have to delay their dream, their agent suggested something that sounded too good to be true: a buyer’s concession. With this financial assistance, the seller agreed to cover part of their closing costs, and suddenly, what seemed impossible was now within reach. John and Mary’s story is not unique; many homebuyers find themselves benefiting from this little-known but powerful tool in real estate called a buyer’s concession.
In a competitive real estate market, every dollar counts. For many first-time buyers or even experienced homeowners, buyer’s concessions can make the difference between walking away from a deal and securing the home of their dreams. But what exactly are buyer’s concessions, and how can they benefit both buyers and sellers?
What Are Buyer’s Concessions?
A buyers concession is an agreement in which the seller agrees to pay for some of the buyer’s closing costs, which can include loan origination fees, property taxes, title insurance, and more. These concessions are a form of financial assistance from the seller to help ease the buyer’s out-of-pocket expenses at the time of closing.
Closing costs typically range from 2% to 5% of the home’s purchase price, depending on the location and the specifics of the deal. For a home priced at $300,000, the closing costs could be anywhere from $6,000 to $15,000, a significant amount for many buyers. By offering a concession, the seller helps reduce this financial burden, making the deal more attractive and affordable for the buyer.
Why Do Sellers Offer Concessions?
At first glance, it might seem counterintuitive for a seller to agree to pay part of the buyer’s closing costs, but there are several reasons why this can be advantageous for the seller as well.
- Attracting More BuyersIn competitive markets or situations where a home has been on the market for a while, offering a concession can be a powerful incentive to attract more buyers. A concession can sweeten the deal and make a property stand out from the competition, especially for first-time buyers who may need help with upfront costs.
- Closing the Deal FasterSellers may offer concessions to speed up the closing process. In cases where a buyer is interested but short on cash for closing costs, a concession can help seal the deal. This is especially beneficial for sellers who are looking to sell quickly, such as those relocating for work or facing financial pressures like foreclosure.
- Negotiating LeverageOffering concessions can also be a strategic move in negotiations. For example, suppose a buyer requests repairs or price reductions during the inspection phase. In that case, a seller may offer concessions instead to avoid lowering the sale price or spending money on repairs.
Types of Buyer’s Concessions
There are several different types of buyer’s concessions that sellers can offer, depending on the needs of the buyer and the terms of the negotiation. Some common types include:
- Closing Cost Assistance
- The most common type of concession involves the seller covering some or all of the buyer’s closing costs. These costs can include loan origination fees, appraisal fees, title insurance, and prepaid taxes. Covering these expenses can significantly reduce the buyer’s out-of-pocket costs at closing.
- Repair Credits
- In some cases, a home inspection may reveal issues that need to be addressed, such as a leaky roof or faulty wiring. Instead of making the repairs themselves, a seller may offer a repair credit, which allows the buyer to use the money toward the cost of repairs after closing.
- Rate Buydown
- In a rate buydown, the seller pays a portion of the buyer’s mortgage interest upfront, reducing the interest rate for a specified period. This can lower the buyer’s monthly mortgage payments, making the home more affordable in the short term.
- Property Tax Assistance
- In some cases, sellers may agree to pay a portion of the property taxes for the first year after the sale. This can help buyers ease into the costs of homeownership, especially in areas with high property taxes.
How Buyer’s Concessions Benefit Buyers
For buyers, especially first-timers, buyer’s concessions can be a game-changer. With home prices continuing to rise, many buyers find themselves stretched thin when it comes to upfront costs. In fact, according to the National Association of Realtors (NAR), the median down payment for first-time buyers was just 6% in 2023, compared to 10% for repeat buyers. This means that many buyers are using a large portion of their savings for the down payment, leaving little room for closing costs.
Buyer’s concessions can help bridge that gap. By covering some of the closing costs, buyers can keep more money in their pockets, making homeownership more attainable. This is particularly important in high-cost markets like New York or San Francisco, where closing costs can easily reach five figures.
The Financial Impact of Buyer’s Concessions
To understand just how significant a buyer’s concessions can be, let’s look at an example. Suppose a buyer is purchasing a $350,000 home, and the closing costs amount to 4% of the purchase price, or $14,000. Without a concession, the buyer would need to come up with the full $14,000 in addition to their down payment. However, if the seller agrees to cover 2% of the closing costs, the buyer’s out-of-pocket expense would be reduced to $7,000, a much more manageable amount.
In this case, the concession could mean the difference between a buyer being able to close the deal or having to walk away from the purchase.
Limits and Restrictions on Concessions
While buyer’s concessions can be a powerful tool, there are limits and restrictions on how much a seller can contribute, depending on the type of loan the buyer is using. For example:
- FHA Loans: Sellers can contribute up to 6% of the home’s sale price toward closing costs.
- VA Loans: Seller contributions are typically capped at 4% of the sale price.
- Conventional Loans: For traditional loans, the limits on seller contributions vary depending on the size of the buyer’s down payment. If the buyer is making a down payment of less than 10%, the seller can contribute up to 3% of the sale price. For down payments between 10% and 25%, the limit increases to 6%.
It’s also important to note that lenders may place restrictions on the types of concessions that can be offered. For example, some lenders may not allow sellers to cover certain fees, such as the buyer’s home inspection or appraisal fees.
Buyer’s Concessions in a Changing Market
In today’s fluctuating real estate market, buyer’s concessions can play a significant role in negotiations between buyers and sellers. According to Redfin, 42% of sellers in the U.S. offered some concession to buyers in the final quarter of 2022, a marked increase from the previous year when concessions were less common due to the hot seller’s market.
As the market shifts, buyers may find themselves with more negotiating power, particularly in areas where inventory has increased and demand has softened. In such markets, sellers are more likely to offer concessions to attract buyers and close deals.
Conclusion: Making the Most of Buyer’s Concessions
For both buyers and sellers, buyer’s concessions offer a unique opportunity to negotiate favorable terms in a real estate transaction. For buyers, especially first-time homeowners, concessions can provide much-needed financial relief, making homeownership more attainable. For sellers, offering concessions can help close deals more quickly, especially in competitive or slower markets.
Whether you’re buying your first home or looking to upgrade, understanding buyer’s concessions can give you an edge in negotiations and help you navigate the financial complexities of purchasing a home. As the real estate market continues to evolve, buyer’s concessions will remain a valuable tool for both sides of the deal, providing flexibility and financial assistance when it’s needed most.
