Homebuying FAQs: What are Concessions? by Jennifer Prestwich REALTOR®

Home Buying FAQs: What are Concessions?

When a Home Buyer has decided on a home, there are many questions that arise.  One of the most common questions that pops up is about “Concessions”.  

What are Concessions?  Basically, this is a dollar amount that the seller agrees to pay out of the sales price to help the buyer with certain costs associated with closing on a home purchase.  The Colorado Contract to Buy and Sell addresses Seller Concessions specifically:

 

 

You can see that an actual dollar amount is specified in the contract.  When submitting an offer, you will want to confer with your lender and your Realtor to see what the best amount to put into this line.  Remember that this will come off of the seller’s bottom line, so your offer price will actually end up being reduced by this amount.  It is very important, therefore, to examine what the comparable properties in the area are selling for, and if concessions have been used in these comps.

For example, if the asking price on a home is $250,000 and the seller has granted the buyer 3% in concessions, that amount is $7,500.  Effectively, this means that the seller is actually getting $242,500 for their home.

In a multiple offer situation, concessions may be the deciding factor between 2 contracts.  Even if one offer is lower than another, a seller will look at the bottom line to determine which offer is actually stronger or more preferable.  Sometimes, the buyer can write an offer that is higher than asking price to offset the amount of Concessions being requested.  Keep in mind that the home will still need to appraise for the full offer price.

How can Concessions be used?   In the Colorado Contract, it states very clearly that “Seller Concessions are to be used for “closing costs, loan discount points, loan origination fees, prepaid items…, and any other fee, cost, charge, expense or expenditure related to Buyer’s New Loan or other allowable Seller concession.” (see above)

The final sentence in the contract is very important.  “Seller Concession shall be reduced to the extent it exceeds the amount allowed by Buyer’s lender as set forth in the Closing Statement or HUD-1, at Closing.”  What this means is that if a Home Buyer asks for more than they need to help out with their allowable Closing Costs, any overage will go back to the Seller (even though the Seller has signed agreeing to the Concession amount).  There are very strict guidelines about overages not going back to the Buyer due to some shady practices in the past where buyers might write a contract for well over the asking price and walk away with that overage in cash.  (This is what they call “loan fraud!”)

What about Carpet Allowances or Repair Escrows?  Sometimes the Seller will agree to rebate an amount of cash to the buyer for new carpet or repairs of other types.  This will be written into the contract and is usually put into an escrow account earmarked for those repairs.  Again, lenders have very specific guidelines about this, so the money that is escrowed will usually only be available once any repair or replacement has been completed.

Questions about Seller Concessions, or any part of the Home Buying process?  Call me today! 720-341-5235

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