I want to believe that this is an urban legend, but I did find the story in a report written by realty experts. A seller desperate to sell their home was once asked to throw in a Ferrari as a seller concession. Perhaps you were not aware that a prospective home buyer could demand a Ferrari as a term in a home sale? If you plan on selling your house anytime soon, it is time you learned about seller concessions so you know what to do if someone asks for a sports car.
2012 might be a great time to buy house, but sellers are facing a glaring shortage; quality home buyers who can secure funding? The LA Times reports, that in 2011, 1 in 3 realty agents have seen home purchase contracts fail this year. This statistic is concerning given that only 8% of realtors reported cancellations last year. The main culprit has to do with credit worthiness of today’s home buyer.
The housing collapse over the last three years has created dual problems for perspective buyers. First of all, economic turmoil in family finances has lead to lower credit scores. Second, regulation and foreclosure fears have resulted in lenders raising the bar on credit scores that can be approved for a mortgage. With the average FICO score dropping by 20 points, while the average FICO score of those approved by Fannie Mae and Freddie Mac increasing 120 points, sellers may need to help finance a buyer’s purchase. This type of practice is known as seller’s concessions.
What are Concessions and Which Concessions are Common
Technically, any capitulation from the seller deviating from the original price or offer is a seller concession. However, when the term gets bandied about it usually relates to non-asking price incentives offer to buyers in order to close a home sale.
According to a Keller Williams’, a CA based realty firm, survey of their realty agents in 2011, the 10 most common seller concessions were:
1) Paying for Buyer’s Closing Costs
2) Reducing original list price
3) Conducting repairs before closing
4) Purchasing a home warranty protection
5) Moving the close date
6) Purchasing appliances or furniture for a home
7) Providing a repair allowance
8) Paying buyer’s origination fees
9) Providing upgrade allowances
10) Paying buyer’s commitment fees
The survey showed that on average concessions amounted to 3% of the agreed purchase price. This is close to the maximum that is generally allowed in concessions from a mortgage company. Seller concessions are common too. The survey showed 2/3 of realtors represented sellers that paid at least a portion of the buyer’s closing costs.
While concessions can be far and wide, they typically break down into three broad categories: concessions to lower the buyer’s cash requirements, concessions to lower monthly financing costs and incentives to add value to the purchase.
Concessions that Lower the Buyer’s Cash Requirements
Sellers often find that they are haggling over financing the buyer’s mortgage purchase more than the housing price. You’ll notice in the survey I referenced above that paying for closing costs was more common in California than reducing the price of the home. This is because seller concessions can be a sneaky way to use their mortgage to finance their up-front costs.
It takes a little bit of out-side the box thinking.
Home buyers face a universal obstacle in purchasing a home. Regardless of the monthly mortgage payment a buyer has the ability to pay, purchasing a home requires a large amount of cash up-front. Bankrate.com reports, the average closing costs on a home total over $4,000. Now add in a 5% down payment and most home buyers need around $10,000 in cash to purchase.
How can homeowners finance these costs in their mortgage? Instead of haggling on price, buyers borrow the full sale price in their mortgage, but ask for a seller concession on closing costs. In essence, home buyers are asking sellers for a lower overall price, but request it in the form of financing as a way to increase the amount they can borrow on a mortgage.
Here are some things a home buyer might ask if they are looking for a concession to lower purchasing costs:
- Origination fees
- Inspection fees
- Title insurance
- Down payments
- Escrow requirements at closing
- Mortgage taxes
Concessions to Lower Monthly Financing Costs
Sometimes buyers don’t have a problem with acquiring the cash needed to close on a home purchase, instead they have problems with the mortgage payment being more than they can afford. Just like those that are cash poor, there are seller’s concessions that can finance the income poor as well.
A great example comes from the blog My Personal Finance Journey. An industry professional in yesterday’s article pointed out that seller paid PMI is a common concession. PMI is usually part of a first-time home buyer’s mortgage payment; however the fee can be paid up front by the seller. As a result, the home buyer gets a deduction on their payment instead of their closing costs.
Other examples are:
- Reduction in the asking-price of the home
- Paying the buyer’s lender points for a lower interest rate on their mortgage
- Paying for the seller’s first year of property taxes or homeowners insurance
- Paying for the buyer’s down payment
Incentives to Add Value to the Home Purchase
This is sort of the catch all for everything else, including buying Ferraris.
Home buyers could be facing any number of issues outside of purchasing a home. Perhaps they can afford the home, but want to remodel, upgrade the home, furnish the house, repair the house or yes, buy a car, all expenses they cannot afford after closing costs. Then they may ask for those needs to be included as a concession. Obviously, there are also favorable tax benefits to buyers who would rather pay interest on a house instead of a sports car.
Again, it is a sneaky way of financing through a mortgage, but a legal one. More importantly, it is a way for sellers to close the sale of their home at a time where ideal home buyers are hard to find.