Thursday, June 19, 2008

What are "Seller Concessions" ???

.... well, seller concessions are just what they sound like. The seller is giving up something, or "conceding" something. And it's usually money.

Seller concessions, often called "seller contribution" were intended to help a buyer who didn't have enough money for a down payment AND closing costs, BUT could afford to make the mortgage payments.

Banks usually limit how much a seller can contribute toward a purchase. It is usually no more than 6% of the purchase price. So, simply looked at... you are buying a house for $100,000. You ask the seller, as part of your offer, to pay $4,000 toward the closing costs. The bank is OK with it (as long as the property appraises) and the seller realizes they will net $96,000. Fine.

Here's where the trouble begins. Say a seller has his property on the market for $100,000 and that is what he wants/needs to take out of it. No negotiating. "Net to me has to be $100,000!" You need the money (say you want the max: 6%)for closing costs or you cant' do it. You will need to offer $106,383.

An aside here... many will think, wait Steve... 6% of 100,000 is $6,000. You are right, but remember we are trying to get 6% of the purchase price... what is 6% of 106,000 ? I'll tell you... it's $6,360. So if you had written a purchase price for $106,360, and then taken away 6% for closing costs, the net to the seller would NOT be $100,000! It would be $99,640. The seller might be a tad bit upset. (work the procedure incorreectly on a $300,000 purchase and you get some people a little upset).

So the bank's appraiser looks at the multiple listing printout and sees the asking price was $100,000 and the final sale price is $106,383. The house will need to appraise for $106,383. What if it was at the top of the fair market value when they were asking $100,000?... or worse, what if it was overpriced at $100K ? It won't appraise and the bank will turn you down.

So the seller concession thing is OK, but you have to be careful. And frankly if there is a multiple offer situation on the house you're interested in, and the other offers do NOT include a seller concession, then you are at a distinct disadvantage.

My suggestion? Save your money. You want to buy a house? Save your money. That shows the bank that you are disciplined enough to handle your finances, and it doesn't complicate the process, and in the long run cost YOU more money.

Questions? email me...

Love this business!

Rock on!

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