With a depressed housing market on the mend, this presents a great opportunity people looking to buy their first home. As is with most first time home buyers, cash is at a premium. Today we’ll talk about a clause in a real estate purchase used to help called seller concessions.
What are seller concessions?
Seller concessions, like it sounds, is where the seller of a home, “concedes” some of their proceeds to help the buyer pay for mortgage and other closing costs and or prepaids on the purchase of a home. The offer to buy the real estate normally comes with a minor upward adjustment to sales price to allow the seller to get to the same net figure. If done correctly, this can reduce the amount a borrower has to bring to closing by thousands of dollars.
How do seller concessions work?
For example, Michelle, in Kansas City is buying a home for her first time. She wants to buy a home for $200,000, qualifies for a 95% mortgage and has roughly $10,000 to put down. Michelle can offer $204,000 with $4,000 in seller concessions. The math works out as follows:
|No Seller Concessions||With Seller Concessions|
|Closing Costs and Prepaids||$4,000||$4,000|
|Due at Closing||$14,000||$10,200|
The above example illustrates how offering a higher sales price, but asking for seller concessions to pay for closing costs allows the seller to get to their target sales price but helps the buyer get into their home with the minimum amount of cash possible. The mortgage balance is a little higher but the change to payment is negligible and cash is at a premium.
To conclude, the use of seller concessions will help a buyer purchase a new home when money for closing costs is scarce. This helps credit worthy buyers purchase homes and sellers obtain what they were hoping to get out of their property.