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Seller’s Concessions: How do they work and how do I calculate them?

By Mike Rankin

Mortgage and Lending with ClearPath Mortgage Solutions, Inc. NMLS #1394615 NMLS # 423279

September 27, 2014 10:24 PM

Seller’s Concessions

How do they work and how do I calculate them?

I think seller concessions or seller contributions is an awful term, as it is so misleading. We all know there is nothing free in life! At least not free in a home sale/buy transaction. Seller concessions are essentially buyer financed closing costs/prepaid items. They are used when a borrower either does not have enough money to pay for their closing costs out of pocket or when they would rather keep their cash on hand and finance the closing costs into their loan. I am seeing seller concessions used a lot in the upstate NY area, as many first time home buyers don’t have a lot of money to put a down payment down and pay for closing costs and pre-paid items.

Here is an example: When a buyer finds a home for say $150,000 they may only want to offer $141,000 for the home, but they elect to have seller concessions. That means their offer looks like this “I’ll offer you $150,000 for your home, but I want $9,000 in seller concessions.” The seller is still only getting $141,000 but the buyer is inflating the purchase price to finance $9,000 in concessions. As long as the concessions stay below the requirements for the loan they are applying for and the home appraises high enough there won’t be any issues.

I hear that some geographic locations do not entertain concessions. Many Realtors are against them and even attorneys don’t understand them. I think that seller concessions are ingenious and I have never seen an issue with them as long as the home appraises high enough. Here is how you calculate concessions. For FHA loans the limit is 6% of your purchase price, VA is technically 4% but effectively unlimited, USDA allows for unlimited concessions, and conventional owner occupied homes are allowed 3% and investment properties are 2%. Take your clients “NET TO SELLER” offer. In the above example that is $141,000. You will then divide that number by the either .94 for 6%, .97 for 3% and .98 for 2% which will give you your total purchase price. The concessions will be the difference between the “NET TO SELLER” and “THE TOTAL PURCHASE” just calculated.

Are you using seller concessions. It may be away to help more clients if you are not.

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Andrew Mooers | 207.532.6573

MOOERS REALTY - Houlton, ME

Northern Maine Real Estate-Aroostook County Broker

All well and good to jack in the seller do this, contribute that, fix whatever is keeping the wagon rolling into a real estate closing on time. But appraisers have to see the value is there or not.

Sep 27, 2014 10:35 PM

Mike Rankin

Albany, NY
Roy Kelley

Gaithersburg, MD

Joe Petrowsky

Mortgage Consultant, Right Trac Financial Group, Inc. NMLS # 2709 - Manchester, CT

Your Mortgage Consultant for Life

Good morning Mike. Great topic and you explained it very well. You are right about certain geographic areas or sellers markets that you won't see a seller concession, but we both see it a lot.

Make it a great week!

Sep 28, 2014 08:36 PM

Roy Kelley

Retired - Gaithersburg, MD

This is very good information for prospective mortgage borrowers and their agents.

Best wishes for great success with your ActiveRain blogging.

Sep 29, 2014 09:24 PM

Mike Rankin

Albany, NY

Randy Kirsch

Right Trac Financial Group, Inc., NMLS# 2709 - Manchester, CT

(NMLS# 1012303) Your Dedicated Mortgage Consultant

Good morning Mike. While your explanation is somewhat simplified (and I understand that you are not out to write "War and Peace"), I am wondering what happens in the real life situation where the seller ends up paying a higher sales commission because of the higher price, and likewise, pays (in some states) higher transfer taxes based on the higher price. Is there any way to level the playing field and get the seller to the point where the seller is really getting what they expected in the first place when they were willing to accept a $141,000 offer, but got a $150,000 offer with $9,000 in concessions?

Sep 29, 2014 09:47 PM

Mike Rankin

ClearPath Mortgage Solutions, Inc. NMLS #1394615 - Albany, NY

Mortgage Consultant

Randy Kirsch - Hi Randy , That is a great question and thank you for asking it! Some areas are more concession prone than others. In upstate NY it is usually written up in the sales agreement that the commission is based upon the net to seller. I am not sure of the legality of this, but that protects the seller from paying the commissions on the inflated price. With regards to transfer tax that is a very good point. If the seller accepts the offer with concessions they need to factor this in. Most of them do not know much about this potential extra cost. I think you would do a great job to write a blog about that for all of us ;-). I will share it in my spheres for sure! I’m not sure about the question you are asking about how to “level the playing field”. I think there needs to be a re-education on concessions and renaming of the term so that sellers and buyers are not so confused by it and are not paying extra costs in order to help out the buyer (e.i. paying higher transfer taxes due to an inflated price).

Bottom line is that seller concessions help more sales transactions take place and from my calculations the transfer tax cost in my area for a $10,000 concession is only $40 which is a small price to get your home sold if you are lacking offers with no concessions.

What are your thoughts?

Oct 02, 2014 12:12 AM

Randy Kirsch

Manchester, CT

Mike Rankin - I think as long as the sales person and the seller all agree on what the commission is based on and the buyer's sales rep is aware as well that commissions are based upon the net to the seller rather than the gross price stated in the contract, it would seem that it would be an enforceable agreement, but I am not rendering any legal opinions by making that statement and none should be inferred. It seems that full disclosure all around that commissions are based on net to seller is the key. As for the transfer tax, I am not sure that a town or county recorder of deeds is going to go along with a tax based upon a net figure, but will go on what is stated in the deed or transfer statement that may be filed when the deed is recorded. In CT the transfer tax could be 1% to 1.5%, but in MA the tax is 2% so the amount varies from one state to another and would in any case be a fairly nominal amount in most areas I believe. In CT it would be $100 on a $10,000 concession or $150 if the property value exceeds$800,000. I did not prevbiously actuyally calculate the numvbers and realize that we are talking about a nominal amount in most cases as opposed to the commission which might change by a more substantial sum based upon the amount of the concession. Your solution seems like it would be workable with full disclosure before all is signed and delivered as I said.

Oct 02, 2014 12:34 AM

Seller’s Concessions: How do they work and how do I calculate them?

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