28 - Understanding and Utilizing Seller Concessions for Maximum Home Buying Advantage

Ever thought about how you might be leaving money on the table in your home buying negotiations? Well, we've got the perfect episode for you! Today, we're unpacking the mysterious world of seller concessions, and how they can work in your favor. We'll guide you on how to seek them out, negotiate them, and the remarkable role they can play in reducing the financial strain of homeownership. We delve into the specifics, exposing the limits, the caveats, and how to navigate them. Plus, we’ll explain how you can combine these concessions with down payment assistance programs to maximize your savings.

Ready for a revelation? What if you could get a concession, not to replace that worn-out carpet, but to choose your own stylish flooring post-closing? Yes, that's possible! We take you through the finer details of this strategy, and how it could give you a competitive edge in negotiations. This conversation is full of practical advice, real-life examples, and strategies that will alter the way you approach your home buying negotiations. For more insightful tips and guidance, be sure to check out FTHBPros.com. Trust us; this is the episode that makes the complex world of seller concessions simple, helping you better understand the costs associated with buying a home. So sit back, tune in, and let us guide you through your home buying journey.

Transcript

Speaker 1: 0:00

Hello everyone and welcome back to the First Time Homebuyers podcast. Today I'll be discussing an important but often misunderstood aspect of the real estate transaction, which is seller concessions. What exactly are they, how can they benefit you as a buyer and how do you go about negotiating them successfully? Simply put, a seller concession is a credit that the seller agrees to give the buyer at closing to cover certain closing costs. Common closing costs can be paid for. Seller concessions include title insurance fees, transfer taxes, maybe attorney fees if you're in an attorney state, and a lot more.

Speaker 1: 0:42

Seller concessions can help reduce the out-of-pocket expense for the buyer you at closing. So it's important to note that seller concessions are different from price reductions. A price reduction lowers the price of the home. Seller concessions, on the other hand, reduce the amount the buyer has to bring to closing while keeping the purchase price the same. The seller still needs to net the same amount, but some of the buyer's closing costs are paid for out of the seller's proceeds. So what are the benefits of seller concessions? Well, for buyers, especially first time home buyers like you, coming up with the cash needed at closing can challenging. This is where seller concessions can make a huge difference and improve affordability even when the purchase price remains the same. Concessions provide financial breathing room by reducing that upfront cash requirement. So in competitive markets where buyers hold more leverage, concessions can be effective negotiating strategies. They can help you clinch the deal on your dream home without kind of busting your budget. Really savvy buyers use these concessions to lower their out of pocket costs instead of trying to negotiate the purchase price down.

Speaker 1: 1:58

Now how do you negotiate for seller concessions? The first step is to understand your market conditions and norms. In a seller's market where competition is high, large concessions are less common. In a buyer's market with a lot of inventory, sellers are just more willing to offer concessions or willing to offer concessions. Your agent is going to be able to provide insight into the typical concessions in your area, because every area is different, even different cities. Zip codes within a county or different counties within the state are going to be very different. Most sellers are really just looking at their bottom line and a price reduction of $10,000 or concession of $10,000 nets them the same at the end of the transaction. But it could be the difference between you being able to afford the home or not. So in a seller's market you're less likely to see these concessions being available, but a skilled agent will know how to include one in your offer. They'll still work out for both parties.

Speaker 1: 3:03

Some homes may be listed already with seller concessions and when touring, you really should take that into consideration. Do they need extra work? Is the property tax high in that area? So you need something to help offset your maybe higher interest rate that we're seeing right now. There are a lot of ways to use concessions to your advantage.

Speaker 1: 3:23

Now, when are you going to use these concessions? When do you negotiate for them? Typically, you're going to want to include these in your initial offer or after you've had an inspection and you've been able to see what kind of repair work may need to be done, because you may want to ask for concessions instead of actual repair work to go on. So I'll talk about that a little bit more later. But one of the things I want to talk about is what are the limits?

Speaker 1: 3:49

Well, seller concessions are really helpful, right, but there are some limits and caveats to be aware of. Most lenders are going to impose a limit on the percentage of closing costs that can be covered by seller concessions. That's going to change depending on your loan type, your lender, but it's good to assume around 6%. It's not very likely that you come up against that. It may be 3% in some cases. So just something to discuss with your lender and with your agent. Now it's important to also be very realistic. Rarely will a seller agree to cost 100% of your closing costs. Right, they're not gonna give you all the money you would take to get into a home. You need to decide what costs are most important for you to have covered. When making your request, seek guidance from your lender, again an agent, to make sure that they're not only aligning with the lending guidelines, but that they're also aligning with what's the norm in your area.

Speaker 1: 4:43

From a seller's standpoint, offering reasonable concessions can help move a property faster. In a slow market or in a market where there's just not that many buyers and people are dropping prices of homes again. Also in a high interest rate market, if a home has been sitting on the market for a while, a concession can provide incentive for buyers by reducing upfront costs. This allows sellers to net the same amount while helping buyers overcome affordability issues. One thing to note is that just by adding that, maybe as a note, into their MLS system, that doesn't necessarily trigger anything so people can actually get notified that this has been added. It's something that you may need to look for, and make sure that you're checking older homes that maybe have been sitting on the market a little bit longer. Have your agent reach out and ask if the seller would be willing to do any seller concessions on the home, even maybe before you tour it, just to understand if that's something that they'd be amenable to Now. Additionally, concessions can help secure a buyer who's made the highest and best offer but might be constrained on cash availability. So this is a way to creatively bridge that gap. It can really actually help lead to a quicker and smoother sale. So, as a seller, oftentimes you want the most amount you can get back, and maybe helping with a little bit of concessions will actually end up getting you more money back because it's a higher offer than some of the others that were coming in.

Speaker 1: 6:14

Now I wanna give you a couple of examples why I like so much. First, down payment assistance combined with seller concessions. This powerful combination of down payment assistance programs and seller concessions can allow you to purchase a home with minimal out of pocket expenses. So let's first talk about down payment assistance programs. These are designed to help home buyers, especially first time home buyers, with upfront costs. They can be in the form of grants, low interest loans or even credits that don't need to be repaid, sometimes even until the home is sold or refinanced. Some are even forgiven. Eligibility often will depend on factors like your income level, the location of the property, your first time home buyer status. I have an episode on the empowered down payment assistance program If you wanna get an idea of how they work in more detail. But many offer a flat amount or a percentage. This particular program will cover up to 3.5% of your down payment, so 100% of your FHA down payment, leaving you with just the closing costs, which will typically run you around 3%. So you still need to have that available and that's where seller concessions come in, so let's add them into the mix. They're agreements again, where the seller pays for part of your closing costs, and these can include things like your rate buy down, title insurance, prepaid items like property taxes and homeowner's insurance.

Speaker 1: 7:41

So how does this all come together? Let's say you're buying a $400,000 home and you've got that down payment assistance. Normally you'd need down payment plus closing costs, so that 3.5% would be $14,000. Down payment assistance is taking care of that. So you've got that covered. Now you've got that. Let's call it 3% that you need for closing costs, and that's gonna be about $12,000. Let's say the seller says we're gonna go ahead and give you $5,000. Your out of pocket expense is now dropped to under $10,000. You're looking at about $7,000 in total closing costs that you're gonna need to come up with, which is dramatically different than the $26,000. In some cases, this combination can cover a majority of your initial costs, leaving you with very little upfront to pay.

Speaker 1: 8:31

Now. Another example is to use the concession to help buy down your rate. A rate buy down is simply paying a specific amount to the lender that reduces the interest rate. This is not down payment. This is not anything else. This is literally money you're giving to the lender to get a lower interest rate. So let's use our $400,000 example and let's say we have an interest rate of 7%, which right now, around the end of November 2023, is probably about average. We're looking at an FHA loan with that 3.5% down payment. Your payment is going to be about $3,280 per month, and that's including principal interest, tax, insurance, the whole thing.

Speaker 1: 9:13

Let's assume we're getting $10,000 in seller concessions. We can use that for closing costs if we don't have a lot of cash on hand or, in this example, maybe we want to reduce our interest rate, which is going to help lower our monthly payment. If we were to reduce our interest rate from 7% to 6.25%, our monthly payment would be about $3,090, nearly $200 less per month. If we take that cost and just multiply it by month, it would take just about four years just a little over four years, until we broke even on what we paid to the lender. After that, it's all just additional money that we're saving. Make sure to run the numbers. It's not a linear reduction. If you do $20,000, you're not going to get you know one and a half percent discount.

Speaker 1: 10:02

Let's take this a different way. What if we use this to increase our down payment instead of lowering the interest rate? How would that affect our monthly payments? On our $400,000 house, we'd be putting down 3.5%, which is $14,000, but then we're adding that $10,000 instead. That would put us at $24,000, which is 6% down payment. Our monthly payments would be about $3,210 per month. That's a savings of $70 per month. The big difference is that $10,000 goes directly towards equity, while that rate buy down goes to the blend.

Speaker 1: 10:39

Something else to consider if you're paying for that rate buy down and interest rates do drop in the next one, two or three, four years and you do refinance, you're really not coming out ahead. And so part of what this gamble is is that you're saying my expectations is that I'm not really going to be able to get that better rate. Does it make more sense to use that $10,000, have it towards your equity and then refinance in a few years when, hopefully, interest rates will come down Again? We don't know. You might be at the lowest. The interest rates will be for 10 or 15 years, nobody really knows. Right now it looks like interest rates are staying fairly flat. So we're around the high sixes to low sevens, depending on what type of loan and your credit, but getting that to 6.25, let's say, for the life of your loan. You know that that's what that's going to be and you don't have to worry about what interest rates are doing.

Speaker 1: 11:32

The last example is using seller concessions for repairs or upgrades. This is especially relevant when you're eyeing a home that needs maybe a bit of work. Let's break down why it might be better to handle these repairs yourself after closing and how seller concessions can also play kind of a pivotal role here. First let's talk about seller concessions specifically for repairs. Imagine you find your dream home. It's in the best location. You love the layout, but maybe it needs a few repairs. Maybe there's some fixtures or things like that that maybe you're leaking slightly. Nothing that's a deal breaker here, but it's just a lot of work. Maybe that needs to be done. Maybe there's an aging air conditioning system and it's just getting old and it probably will need replacement. Instead of asking the seller to do those repairs or replacements before closing, you can negotiate for the concession. It means the seller credits you a specific amount at closing, reducing your closing costs, which frees up cash for repairs.

Speaker 1: 12:29

Now let's talk about the concession. Why would you want to control the repair process? It's simple Quality and choice. If the seller does the repairs, they might choose the quickest, most cost-effective route, which doesn't always mean the best. Remember, they're not going to be living there afterwards, so they don't care. By taking charge, you can assure that the repairs are done to your satisfaction. You get to choose the contractor, the materials and oversee the process to ensure it's up to your standards. An example is when I bought my first house, it had a water heater that was just about at the end of life. We knew it was going to need to be repaired, and so part of our concessions was not to have them actually do the repair, but to have some kind of credit towards the different things that needed to be done. When we replaced the water heater, we replaced it with a larger unit and a more efficient unit, which isn't what the seller would have done, and so we ended up with a better unit, and it's lasted for a lot longer than what the seller would have done.

Speaker 1: 13:30

Now let's move on to the cosmetic side. Let's use flooring as an example. Say, the home you're interested in has old carpet. It's still in okay condition, but it's just not exactly what you want. Or maybe the color you don't like it's okay.

Speaker 1: 13:45

This is where this strategy comes into play. Instead of asking the seller to replace it, which might lead them to choosing the most basic option, negotiate for concession. This way, post-closing, you have the freedom to choose the new flooring according to your taste in budget. You're not stuck with what the seller picks, which may not align with your style, and last thing you want to do is rip out brand new carpet because it's a color you don't like, a style you don't like, or it's too cheap. Maybe you wanted to do wood flooring and they replaced it with carpet because they thought, well, that would be better for people who are coming in.

Speaker 1: 14:19

So a lot of sellers, instead of replacing old carpet, they'd rather do a concession so that they don't have to come up with money up front either and you can use that towards whatever you want. So we explored seller concessions. It's a really powerful tool. It really can help enhance the affordability, give you kind of a strategic edge in negotiations and, with the right understanding and preparation, you can use concessions to lower your cash needed at closing and get more home for your money or make those cosmetic upgrades more affordable and exactly to your liking. So for personalized advice and assistance with these, hey, feel free to get in touch. I'm always happy to help and just give you some ideas, but I really hope this helped you feel more confident when just thinking about different costs associated with homes and what seller concessions are. And again, to learn more tips on home buying, head over to FTHBProscom. We've got all of our podcast episodes available, articles, newsletter, resource, along with a Facebook group and we're here to help, support you Be home buying.