With the real estate market shifting from being seller dominated to more buyer-friendly, price reductions and seller concessions are starting to make a comeback. As a buyer, which of the two options gives you the most benefit? Let’s start by defining and examining the benefits of these terms.
A seller concession is when a seller agrees to pay all, or a portion of a buyer’s closing costs. Conversely, a price reduction is simply when a seller reduces the initial ask price of the home to entice would-be buyers to make an offer. If a seller chooses to offer a $10,000 seller concession or a $10,000 price reduction, it effectively nets the seller the same proceeds once the home sells. However, there is a drastic difference in how each of these affects a buyer.
A seller concession directly reduces the amount of money a buyer must bring to closing to buy a home. Seller concessions can be applied to a multitude of costs, including but not limited to loan origination charges, title expenses, appraisal costs, taxes, insurance, discount points, mortgage insurance, etc. Therefore, if a buyer were to have $10,000 in closing costs and were to receive $10,000 in seller concessions, the concessions would effectively keep $10,000 in the hands of the buyer post-closing.
A price reduction, understandably, helps a buyer purchase a home at a lower cost. If the buyer is an all-cash buyer, meaning they are not obtaining a loan to purchase the home, the price reduction will also directly reduce their out-of-pocket costs by the amount of the reduction. However, because most buyers looking to finance their home purchase usually put down only a small percentage of the total home value, a price reduction will only reduce their out-of-pocket costs by that percentage of the down payment.
For example, if a buyer is looking to make a 20% down payment on a home that has a $10,000 price reduction, the price reduction will decrease the buyer’s out-of-pocket cost by $2,000, and the other $8,000 is reduced from the loan amount. Decreasing the loan will help the buyer reduce the monthly payment and how much they pay in interest over the life of the loan, but it does not reduce a buyer’s initial cash investment as drastically as compared to seller concessions.
If given the option between a seller concession or a price reduction, which should a buyer choose? In most cases, the seller concession is going to have the greatest impact on a buyer’s finances. If your out-of-pocket costs are reduced by our $10,000 example, this money can be used for bolstering savings, making the new loan payments, investing in other assets, repairs or upgrades to the home if needed, or moving expenses. The funds can even be applied toward reducing the principal balance of the loan at a later date, also reducing the interest paid over the life of the loan, like a price reduction.
Seller concessions give a buyer more flexibility with their finances and can help keep purchasing a home more affordable from the start of your homeownership. Getting seller concessions on an offer is not guaranteed, even in this changing market. Make sure you choose your real estate and mortgage team carefully. The professionals in your corner should have proven strategies and market expertise, as well as work collaboratively together and with you to ensure your offer is accepted and finances are maximized.