During the seller’s market of 2020-2022 when we had multiple offers and bidding wars, sellers didn’t need to offer any incentives such as seller concessions to buyers.
Since May of 2022 we have seen the market shift as we head toward a more balanced market. High home prices and the dramatic increase in interest rates has made home affordability harder and left many buyers sitting on the sidelines. With fewer buyers active in the market sellers are increasingly resorting to incentives such as seller’s concessions to assist home buyers to sell their home.
We have seen a significant uptick in seller concessions, currently at a record 45.1 percent of all transactions.
This chart shows the decrease in seller’s concessions during the seller’s market of 2020 through 2022 and the increase from 2022 to where we are today.
With the implementation of the new NAR Settlement requirements in mid-July, this trend is expected to increase with more sellers offering concessions to buyers as a way to help cover their buyer’s agent compensation.
WHAT ARE SELLER CONCESSIONS
Seller concessions are a dollar amount the seller agrees to contribute to the buyer to cover some of the closing costs or other expenses associated with the purchase. These concessions can be utilized by the buyer for closing costs, to buy down their interest rate, or to help cover their buyer’s agent compensation.
Seller concessions are typically negotiated upfront as part of the purchase agreement. The concession amount may be expressed either as a percentage of the home’s purchase price or a fixed dollar amount.
DO SELLER CONCESSIONS BENEFIT THE BUYER OR THE SELLER?
Seller concessions offer benefits to both buyers and sellers. For buyers, they can help reduce the upfront costs associated with purchasing a home. Buyers with limited cash reserves may now have the opportunity to purchase a home that was previously out of their reach or explore properties of higher value, thanks to the assistance provided by the seller concessions.
For sellers, offering seller concessions can broaden their pool of potential buyers by alleviating some of the financial burden on buyers at closing. Sellers can help ensure a smoother transaction and quicker sale.
SELLER CONCESSIONS VERSUS PRICE REDUCTION
While lowering the listing price may attract more buyers, the impact on a mortgage payment is often negligible. In contrast, offering seller concessions can be far more enticing to buyers, leaving more money in their pocket.
SELLER CONCESSION LIMITS
There are limits on how much a seller can concede to a buyer. The total value of concessions is typically limited to a percentage of the home’s sale price, with maximum seller concessions set between 3 to 6 percent, but this may vary. In some cases, a lower cap may be assigned.
SELLER CONCESSIONS AND LOAN TYPES
Seller concession limits are not uniform — they depend on the buyer’s mortgage loan. Here are some common types of loans and their associated seller concession limits:
–Conventional Loans: Seller concession limits for conventional loans typically range from 3% to 6% of the home’s purchase price. However, the limit varies based on factors such as the buyer’s down payment and the loan-to-value ratio.
–FHA Loans: The Federal Housing Administration (FHA) allows seller concessions of up to 6% of the home’s purchase price or the appraised value — whichever is lower.
–VA Loans: The Department of Veterans Affairs (VA) typically allows seller concessions of up to 4% of the home›s purchase price.
– USDA Loans: The United States Department of Agriculture (USDA) loan program permits seller concessions of up to 6% of the home’s purchase price.
As the real estate landscape evolves, seller concessions emerge as a pivotal strategy for both buyers and sellers, facilitating smoother transactions and broader accessibility to homeownership.
If you have any questions or for more information on seller concessions and how they may benefit you, please don’t hesitate to contact me.
For more information on this and other real estate topics, please visit my website Homes2SellAZ.com. Please contact me if you have any questions or would like help buying or selling a home.