There are a lot of layers in every mortgage transaction. It’s at least a club sandwich. The seller’s concession is one of them. Maybe it’s the bacon.
Since sandwich humor can only take me so far, let’s get back to basics. The seller’s concession is a very effective tool that can help put a lot of deals together. In fact, in New York City’s new development condo market, it’s rare to see a deal go down without one.
What is a seller’s concession?
The word concession implies that something is being conceded or granted. In this context it is the seller who is conceding a monetary credit that can be used toward the buyer’s closing costs.
Why does the seller dig it?
Lowering the price of a unit in a new development condominium could set off a chain reaction. Appraised values are based largely on the most recent sale of a similar unit nearby, preferably in the same building. So, a price reduction would set a lower market for every other unsold unit there.
Developers proactively offer hefty seller concessions in lieu of dropping their price. For them, it is certainly the lesser of two evils because the concession has no impact on the recorded sale price.
…And the buyer?
For many buyers, a seller’s concession is a lot more helpful than a price reduction, at least from a cash standpoint. Closing fees are onerous in New York City, especially compared to just about everywhere else.
Buyers who are purchasing a unit north of $1Million need to bring a significant amount of liquid assets into the transaction. A massive credit that can be applied toward those closing costs would help a buyer considerably more than a price reduction, at least from a liquidity standpoint.
Show me the math
A buyer is interested in a condominium with an asking price of $2,000,000. They plan to make a 20% down payment. How much money would they need?
Twenty percent of two million bucks is $400,000. So, they’ll need at least that much.
Between mansion tax and mortgage tax, and city and state transfer taxes, and title insurance and homeowner’s insurance, and appraisal fees and attorney fees, and all the other fees that the fee collectors collect, we’re talking about somewhere in the neighborhood of $125,000. So, a buyer will need that too.
From a liquid asset standpoint, the buyer needs $525,000 to make it to the finish line. That’s a lot of clams.
IMPACT OF A PRICE REDUCTION
If the seller agreed to reduce the price by $125,000 to $1,875,000, it could reduce the amount of the down payment and closing costs. If the buyer still planned on making a 20% down payment, they’d need only $375,000 for the down payment compared to $400k at the higher sale price ($25,000 savings).
Since some closing costs are calculated based on purchase price and mortgage amount, closing costs come in at a lower number too. In this instance a buyer would save roughly $10,000 after the price drop.
So, in total, after a $125,000 price reduction, the borrower would need $35,000 less to complete the transaction.
IMPACT OF A SELLER’S CONCESSION
If the sale price remained $2Million, but the seller agreed to a concession of $125,000, the buyer would need a whole lot less money to close on the property.
The 20% down payment would be back to $400k and the closing fees would climb back to $125k. Again, $525,000 total. However, the $125,000 concession would be applied directly toward closing costs, leaving the buyer with nothing to pay but the $400,000 down payment.
Ultimately, the concession keeps $125,000 in the buyer’s back pocket, whereas the price reduction would only save $35,000.
**It is important to note, 80% of $2Million is $1.6Million. Eighty percent of $1.875Million is $1.5Million. So, in the seller concession scenario, the loan amount would be $100k higher. If the interest rate was 3%, the monthly payment would be more than $400 higher than the price reduction scenario.
It’s Not All Roses
The way people talk about the seller concession, especially during a negotiation, is overly complicated. I don’t think there’s any other layer in the club sandwich that confuses buyers and sellers, and agents, and attorneys, and loan officers more than the friggen seller’s concession!
During the negotiation, it seems to me that there are way too many rounds of conversations that are devoted to figuring out which fees will be paid by the buyer and which fees will be paid by the seller. No joke, haggling over numbers could easily add two weeks to the process. Here’s an itemized list of most of the fees in a scenario like this:
Title Insurance – $9,355
Mansion Tax – $25,456.25
Mortgage Tax – $30,770
NY State Transfer Tax – $8,146
NYC Transfer Tax – $29,020.13
Title Searches – $875
Sponsor’s Attorney – $3,000
Lender’s Attorney – $1,500
Buyer’s Attorney — $3,000
Tax Escrows – $8,750
Appraisal Fees – $1,000
Processing and Underwriting – $1,500
Capital Contribution – $2,500
Rules of the Concession
As if it wasn’t tricky enough already, there are some other rules to consider as it relates to the seller’s concession. For instance, how much of a concession is allowed. The answer? It depends.
Typically, the amount of the down payment will determine how much of a seller’s concession a lender will allow a borrower to receive. With a down payment of 10 percent or less, they might only allow a concession of up to 3% of the purchase price. With 20% down, the concession threshold likely pushes to 6%. With 25% down or more, many lenders will allow a concession of up to 9% of the purchase price.
You must also consider what the concession can be used for. Certainly, a lender will not allow a buyer to receive actual cash back by way of the concession. The credits must be applied to actual fees.
Repair credits could be dangerous too. For example, if a contract stipulates that the seller is providing a $10,000 credit to repair a damaged roof, the lender would likely specify that any significant repairs should be completed prior to a closing.
An Easier Way
Figure out the down payment.
Estimate the closing costs.
Figure out how much you want to come out of pocket.
Then, formulate your offer based on a structure that meets your criteria.
If liquidity is an issue, and a structure with a concession makes the most sense, keep it simple when making an offer. For example: Offer is $2,000,000 with a $125,000 credit from the seller to be applied toward buyer’s closing costs. Seller nets $1,875,000.
It’ll either be a yes or a no, or maybe they come back and offer to credit half the closing costs. Either way, it’s a simpler game, and the buy-side and sell-side can meet in the middle a lot faster if they’re not haggling over every line item.