Seller Concession Changes

In January of 2010, the Federal Housing Administration (FHA) officially reduced its allowed seller concession charges from 6% of the purchase price to only 3%. While this reduction was enacted in January, the actual change is due to happen this summer.

A seller concession charge is a percentage of the final purchase price that the seller concedes to the buyer. If the buyer accepts the concession agreement, he has to use the money to pay for all, or at least a part of, the final closing costs. Thus buyers can purchase a property without paying fees out of their pocket. The concession charge is usually included in the original offer submitted to the seller by the buyer’s broker.

A higher concession charge allows the buyer to pay for more of their closing costs. Concession charges are not designed to benefit the buyer and can not be transferred to cash at the end of the deal.

It should be noted, when seller’s concessions are used, the purchase price actually increases so an important factor to consider is whether the home will appraise for the higher value. For example, if you purchase a home for $300,000 and have seller’s concessions of 6%, the new purchase price will be $318,000. This increases the amount of the down payment and the home has to appraise for the higher value, if it doesn’t the bank will lend to you at a purchase price of $300,000 and the buyer will have to come up with the remaining $18,000 in down payment money at closing.

It’s safe to say this practice is rare in Manhattan, because co-ops do not approve (they see asking for seller concessions as a sign of weakness in the buyer’s financial profile) and with the average price of an apartment well over $1.0M it is not easy to find an apartment that will be selling at 6% below the appraised value.

This reduction in seller concession charges will undoubtedly hurt the already ailing market. A large number of buyers simply do not have that much cash, which is exactly why they are taking out mortgages to purchase their homes. With a smaller seller concession charge, they might have to pay for closing costs out of their pocket, which is simply not possible for some.