Seller Concessions vs. Price Reduction

We’ve all seen that one thing while shopping that we fall in love with, but then look at the price tag have second thoughts. Is it really worth that? Maybe there is an imperfection you could overlook in exchange for a discount? Maybe it’s been for sale for a long time and you could ask for a markdown? What if it’s a house that you’ve fallen in love with but the price tag doesn’t seem worth it after a closer look?

There are ways to negotiate a lower price that offer different outcomes: ask for a price reduction or ask for seller concessions. Let’s look at a couple angles price matters to your budget and then what happens when we ask for either concessions or a price reduction.

The Listing Price

Once you’re pre-approved with your trusted lender you’ll be told how much you are approved to borrow from the lender. This is the price point you want to stay at or under when shopping for your new home. It is best to get pre-approved before you go house shopping so you know what you can afford and stay focused on homes in that price range. Once under contract, if a price reduction becomes a reasonable request, it will lower the final price tag on the home.

The Monthly Payment

It is wise to know what your monthly payments will look like at any price point you qualify to buy in. For instance, you may be pre-approved for up to $500,000 but the monthly payment that makes the most sense for your budget is something closer to $450,000. Talk to your lender about what you feel is a comfortable monthly payment for your income and other expenses. You don’t want to buy a house that you can’t confidently make timely payments on every month. Likewise, knowing the interest rate and whether it makes sense to buy it down for a lower monthly payment is important to know – especially if you are going to ask for concessions.

Seller Concessions

So, just what are seller concessions and why would you ask for them? Concession are a negotiated amount the seller agrees to pay out of their proceeds from the sale toward the buyer’s costs of purchasing the home. The costs and fees seller concessions are allowed to be put towards are determined by the lender and may include: closing costs, loan origination fees, prepaids (HOA fees, taxes, insurance, and the like), and discount points. The maximum amount of money allowed to be contributed is based on your total closing costs.

You cannot use seller concessions towards your down payment, remodel projects, new furniture, paying off debt, a new car, or anything else unrelated to the cost of closing your loan. If you ask for more than the allowed maximum you will not be able to pocket the extra cash. Excess credits are refunded if you can’t find allowable costs to use the money toward.

Seller concessions can go a long way to cover your closing costs and even buy down your interest rate with discount points to lower your monthly payment. Best case scenario: The seller covers all your closing costs and prepaid items, and you can buy down your interest rate with the rest. The only money you’d need to bring to the deal is your earnest money and down payment.

Price Reduction

A price reduction is different than negotiating a lower offer that will put you under contract. A price reduction occurs after going to contract. It is often negotiated if the appraisal comes back lower than the proposed purchase price, or the inspection reveals there is more work that needs done to the home than what was observed in a tour of the property.

If the appraisal comes back lower than what you offered to purchase the house, your lender will only loan money on what the appraisal says the home is worth and not what you are offering to buy the property for. You have the option to buy for your proposed offer if you want, but you’ll have to bring in the extra cash to make up the difference between your offer and the appraisal. However, if you don’t have or want to put up the extra cash, it makes sense to ask for a price reduction to more appropriately reflect the value of the home and for your loan.

In the event there are numerous items that concern you or expensive repairs that show up in a home inspection which you are not able to afford on your dime (or your time), you can negotiate with the seller to take care of the items which are important to you. If the seller does not agree to all or any of your requests, the next option is to negotiate a price reduction based on the estimated cost of the repairs. With a price reduction, you’ll save money you can put towards the repairs yourself.

Which Is Better: Seller Concessions or Price Reduction?

Typically, concessions stretch the savings farther, especially when you consider you can buy down your interest rate. In an ideal world, you’d be able to negotiate both. Ultimately, it depends on what your goals are and what makes the most sense for your situation.

Need an expert negotiator on your side? Contact us to help with your next home purchase!