Need to Sweeten the Deal? Here’s How Seller Concessions Work in Real Estate

Mortgage lenders place limits on financing concessions

When negotiating, you and the buyer can only agree to cover closing costs up to the maximum seller contribution limit set by the buyer’s lender.

“We have to make sure that the buyer’s lender is comfortable with the amount of the credit because all lenders will have a varying tolerance of how much of a credit can be applied at closing,” Pages-Oliver shares.

Lenders set limits on the amount a seller can cover for the buyer for two reasons. One is to ensure the market isn’t artificially inflated (e.g., the asking price of a house is overpriced by $50,000 over market value, but the seller offers $50,000 in credits to the buyer. In this scenario, the deal may or may not be good for the buyer, but in any event, it is inflating the market value and will impact the value of the homes around it).

A second reason is to help ensure the buyer isn’t being tempted into a home they otherwise shouldn’t afford with artificially low closing costs. Basically, the lender does not want the seller’s generous contributions to influence the buyer to purchase a home that they shouldn’t afford.

Seller concessions were used very creatively leading up to the housing collapse and financial crisis of 2008. These limits on seller concessions are one of the many layers of tightened lending guidelines implemented to prevent a repeat of these issues in the future.

Fannie Mae guidelines set caps on seller concessions — also called “interested party contributions” (IPCs) — for conventional loans as follows:

• 3% maximum if the buyer puts down less than 10% on a primary or secondary home
• 6% maximum if the buyer puts down 10% to 25% on a primary or secondary home
• 9% maximum if the buyer puts down 25% or more on a primary or secondary home (however, note that this would be a very generous concession)
• 2% maximum for investment properties with down payments of any amount

For example, if you’re selling a $300,000 home to a buyer who puts down 10%, then you can only offer to cover up to 3% in closing costs — that’s $9,000 maximum. So you can’t offer $10,000 in closing costs. Instead, you would need to adjust the property’s sales price to reflect the amount of contribution that exceeds the maximum ($299,000).

Sales concessions are valuable items included in the sale

While financing concessions refer to actual dollars and cents, sales concessions refer to non-realty items of value that the seller includes to incentivize the buyer to purchase their home. Some examples of sales concessions include:

• Provide a decorating allowance, a sum of money for the buyer to put towards a desired renovation or furniture.
• Include furniture or other loose home items, such as window coverings, appliances, or a pool table with the sale.
• Allow the buyer to choose the moving date.
• Offer a one-year home warranty.
• Include a car with the home sale.

Sellers must deduct sales concessions from the home sale price

Mortgage lenders set rules for sale concessions to ensure that the approved mortgage is only financing the home, not the included items of value. According to Fannie Mae, the value of sales concessions “must be deducted from the sales price when calculating the loan-to-value (LTV) ratio and combined loan-to-value- ratios for underwriting and eligibility purposes.”

For instance, if you sell your home for $300,000 and the buyer wants you to include $5,000 worth of furniture, you cannot adjust the price to $305,000 to include the value of the furniture. Instead, you must include the furniture with the original sale price ($300,000).

Alternatively, a seller and buyer can agree to negotiate these non-realty items of value after the sale concludes and exclude the items from the purchase contract. For example, a seller could agree to sell the buyer their furniture after the home sale at a discounted price as an incentive.

How concessions help sellers close their home sale

Although the seller is making, well, quite literally a concession, seller concessions can benefit the seller, as well.

Speed up negotiations

Often, a seller can offer a concession during negotiations to help the deal move forward. Let’s say a potential buyer has an inspection contingency, and the inspection report reveals that the roof is failing and requires immediate repair.

“So in that scenario, which we’ve encountered several times, it’s new information, which now by law, is attached to the property. So even if this contract doesn’t move forward and it doesn’t close, by law, that information now needs to be disclosed to all buyers moving forward,”  Pages-Oliver explains.

The seller can keep the deal moving forward with the current buyer by offering the buyer repair credits to cover all or a portion of the roof repair. Otherwise, the seller will need to go back to the market and either repair the roof or disclose its condition to future buyers.

That said, using concessions to keep the current buyer engaged is usually the most expedient way to close the deal.

Boost a buyer’s ability to close

In some instances, sellers can offer concessions to help the buyer pay less cash out of pocket for their down payment.

For example, let’s say the buyer wants to purchase a home for $300,000. They’re making a 20% down payment of $60,000, and they’ll owe $10,000 in closing costs. That means they’ll need to pay $70,000 in cash upfront to purchase the home.

However, if the seller and buyer agree to raise the sale price to $310,000 with the seller covering the $10,000 in closing costs, the buyer will only need to pay $62,000 cash upfront for their 20% down payment.

The seller still walks away with $300,000, but the buyer pays $8,000 less in cash upfront, as this sum is now included in their mortgage. However, it’s important to note that this strategy will only work if the appraisal supports the higher value and the borrower can qualify for the higher loan amount.

How to handle concession negotiations

Negotiating seller concessions is all about strategy. Here are some tips to help you keep more cash in your pocket:

• Start with the right price: Price your home slightly higher so you can offer concessions without hurting your bottom line. Buyers love feeling like they’re getting a deal. But be careful — noticing an overpriced home, buyers might not consider your home or wait for a price drop. Understanding market conditions is key to keeping interest high while giving yourself negotiation flexibility (more on this below).
• Emphasize your home’s value: Highlight upgrades, new appliances, or move-in-ready features to justify why you shouldn’t have to offer big concessions. Make buyers feel like they’re already winning.
• Get something in return: If a buyer asks for closing cost help, negotiate a faster closing, fewer contingencies, or limit inspection repairs. Give and take!
• Use concessions strategically: Rather than handing over cash, consider offering a home warranty, covering minor repairs, or leaving behind valuable appliances.
• Stay confident but flexible: Be firm on your limits, but don’t be afraid to make small compromises to keep the deal moving.

How market conditions influence seller concessions

Understanding market conditions is crucial when negotiating concessions because it affects your bargaining power.

In a seller’s market, where the demand is high, and homes sell quickly, you can stand your ground and offer fewer concessions since buyers are competing. But in a buyer’s market, where homes sit longer, throwing in perks like closing cost assistance or repair credits can make your property more appealing.

Checking out local trends and buyer expectations helps you stay ahead. The more you know, the better you can negotiate without giving away more than you need to.

Concessions keep the ball rolling

To recap, concessions are closing costs or non-realty items of value that the seller offers the buyer to close the deal. The amount of concessions you choose to offer depends entirely on your unique selling position.

Evaluate your home’s position, gauge the strength of the market, and heed advice from your real estate agent to determine if you should weave concessions into the negotiation process. Partner with a top real estate agent in your area today for expert guidance.

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