Now that the market has shifted from a strong sellers market to a buyers market, (shhh... some of the sellers don't know this yet) there are different ways that a buyer can take advantage of this.
Watching the Multiple Listing Service and listening to Realtors I am hearing that homes are on the market longer and sellers are not getting the list price for their home. There are still many buyers, but if they can't come to a meeting of the minds with sellers over price and terms of a purchase there isn't a market for these homes.
Buyers face a number of challenges in every purchase. They have to get qualified for a loan, raise the down payment money and they need to pay for closing costs. In a strong sellers market they have to do all three. In a strong buyers market they can negotiate with the seller to reduce the price, which will reduce their down payment requirement, improve their chances to qualify for a loan, and they can negotiate with the seller to have the seller pay for the closing costs.
What is a seller concession? This is when the seller takes part of the proceeds of the sale of their home and makes them available to the buy at closing to pay for closing costs. There are rules that lenders apply to this practice. With conforming loans the seller can pay a 3% seller concession for loans with a 5% down payment. They can pay a 6% seller concession for a 10% down payment or more and 10% for a 30% down payment. For an FHA loan the seller can pay a 6% seller concession without regard for the down payment. With a VA loan the buyer can negotiate to have the seller pay for all of the closing costs.
This does not mean that you can walk away with cash? No. If your seller concession is more than the amount of closing costs, the price is reduced or the remaining proceeds are used to pay down the loan balance. Sorry, no quick windfall here.
Now that we know what it is and how much we can get, how do we negotiate for a concession? First, you need to get pre-qualified and discuss all of your options you're your loan officer. They will tell you the amount of closing costs based on the price of the home and your loan amount. They will then let you know the size of concession you can negotiate for. Next, you need to tell your Buyer's Real Estate Agent, we talked about them earlier in this blog, the amount of your down payment and the amount of the seller concession they need to help you negotiate into the transaction. This will help in the negotiation. Finally you need to find a house and start the negotiation.
The negotiation typically works like this. You see a home you like and you make an offer less that the list price. The seller counters with a higher amount and eventually you come to an agreement. The difference between the list price and the agreed upon purchase price is usually the amount available for the seller concession.
List Price: $300,000
Down Payment $30,000 (10%)
Max Seller Concession: $18,000 (6% of sale price)
Closing Costs and Escrows: $11,000
In this case you would only be able to get a seller concession for $11,000 since that is the amount of the closing costs and escrows you would be paying at the closing.
To get the $11,000 you will need to get the price negotiated to $289,000 or less. If you were able to negotiate to a price of $289,000 you would add the closing costs to that and your offer would be $300,000 with $11,000 concession from the seller to pay closing costs.
Why do you go up after the price is agreed upon at a lower amount? This is because the seller isn't going to reduce the price and pay for your closing costs. They would be making all of the concessions here. This would also reduce the proceeds to them after the sale. When they agreed to the $289,000 they agreed that that is what they are walking away with. They don't care what you pay for the house as long as they have their $289,000 in this case. Remember, for a negotiation to be successful, each side needs to walk away with a victory.
The key to negotiating this successfully is to make sure you are qualified for the loan and that the Real Estate Agent and Loan Officer are working together. They will need to run numbers to make sure this works for you, the transaction and the loan program. It will also make for a clear communication of intent between you and the seller, which will build trust and make for a smooth transaction.
Please contact me if you have questions regarding seller concession. They can be a little confusing. You can email me at John_Klassen@Countrywide.com.
As always, best of luck with your new home purchase.
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