What Does “Concession” Mean in Real Estate? | Everyday Life

凡乐仙人居 2015-12-06

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If a seller or landlord is offering concessions, it's a safe bet that the economy is hurting and he's desperate to sell or rent his property. Concessions are anything that sweetens the pot in a real estate deal. In the case of sales, they might be in the form of cash back to the buyer, a reduction in sales price, or the inclusion of a few appliances in the deal. Most commonly, however, concessions involve sellers picking up some or all of the closing costs. Lenders have strict rules regarding concessions which typically prohibit a direct cash exchange between buyers and sellers outside of settlement, which could be construed as fraud.

Home Sales

A concession's dollar amount is included in the real estate contract. The seller might concede that the property needs a bit of work, so he might offer a $5,000 concession to compensate for this, or he might just be eager to sell so he's willing to pick up some of your costs. The seller contributes this cash from his own proceeds, and the purchase price is not affected. If you're buying a home for $275,000, a $5,000 concession does not lower the purchase price to $270,000. The seller's $5,000 contribution can only be applied to your settlement costs.

Effect

A concession means the seller will walk away with a little less cash at closing, and the buyer will not have to come up with as much cash. For example, if you're purchasing a home for $275,000, if you must put 10 percent down, and if you have $5,000 in closing costs, you'd need $32,500 at closing. If the buyer offers you a $5,000 concession, you'd only have to come up with the $27,500 down payment.

Limits

If you're buying a $275,000 home and you're putting $27,500 down, your lender is financing and investing $247,500 in the transaction. Lenders therefore impose some limits – they don't want the deal to turn into a get-rich-quick scheme for the buyer. You must use all of the concession money at closing – you can't walk out with a check for the unused portion that you can spend on whatever you like. Fannie Mae and Freddie Mac limit concessions to 3 percent of the sales price or of the appraised value of the home if you're putting down less than 10 percent, but this increases to 6 percent if your down payment is greater. Private lenders also follow these general guidelines. FHA loans only allow the seller to pay the buyer's points at closing – anything else will require more of a down payment. The VA loan limit is 4 percent.

Rentals

Investors sitting on empty rental properties have been known to make concessions as well to lure in good tenants. These guidelines aren’t regulated and depend a great deal on how badly the landlord wants to rent the property. Rental concessions can include a month's free rent, little or no security deposit, or lower monthly payments if you agree to a multi-year lease and the landlord knows he won't have to worry about finding a new tenant for a while.

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About the Author

Beverly Bird has been writing professionally since 1983. She is the author of several novels including the bestselling "Comes the Rain" and "With Every Breath." Bird also has extensive experience as a paralegal, primarily in the areas of divorce and family law, bankruptcy and estate law. She covers many legal topics in her articles.