Sellers Concessions Help Sell Houses in Slow Market

With the real estate market so slow these days, many Realtors are suggesting that the sellers offer incentives to the buyers who purchase their home. This can be a great way to separate your home from the many other homes on the market. These concessions are so popular now that I am going to revisit the issue I discussed in my June 11, 2007 article, “How can a “carpeting allowance” be a bad thing?"

There are right and wrong ways to give seller concessions. The way it is structured can make all the difference in the world.

Limits to seller concessions

Most mortgage programs set limits to the amount of concessions a seller can make to the buyer before it begins to affect the sales price of the home. For instance, with a conventional 30 year fixed rate mortgage, if you have a down payment of 10%, the seller can give you up to 6% of the sales price as a concession. If the concessions are greater than 10%, the sales price will be reduced by that amount when the lender calculates the down payment and loan-to-value ratios (LTV).

Types of acceptable seller concessions

Typically, sellers can pay for non-recurring closing costs up to the maximum allowed by the lender for the specific mortgage program. Also, sellers can pay points to help the buyer lower their interest rate or pay for a temporary buydown. Also, if the buyer and seller agree to a payment abatement program (see my posts on PITI Payment Abatement Programs and Interest-Only Payment Abatement Programs for more information on payment abatement programs) the seller can pay for the payments that the buyer will skip.

Types of unacceptable seller concessions

Sellers can never give the down payment for the purchase to the buyer nor can they give them allowances for decorating, carpeting, repairs, etc. Many real estate professionals do not understand this and write them into the sales contract. If you are going to do repairs or replace carpeting for the buyers, it will have to be done before closing, put into escrow for the buyers to do later, or paid directly to the contractor who is going to do the work. If not, it will affect the sales price used by the lender to calculate down payment and LTV.

Concessions are a great way to entice buyers to take a closer look at your property and make an offer. But, it must be done correctly for the buyer to get the full benefit of the conecssion.