The differences between Seller Contributions and Seller Concessions

May 4, 2011

One issue that has popped up recently on several files are seller concessions.  It is important to understand the difference between a seller contribution and a seller concession.

 

A seller contribution is financial contribution toward a purchaser’s closing costs, pre-paids, or discount points.  These are very common and I am certain everyone is familiar with them.  There are limits to the amount of seller contributions that can be made.  The limits are based on the loan to value of a transaction. For example, 3% for >90% LTV on conventional, 6% for <90% LTV conventional, all FHA, VA, USDA; 2% for all investment property regardless of LTV etc.

 

A seller concession however is a very different animal.  A seller concession is an item or financial incentive that is considered an inducement to purchase.  The value of a seller concession will result in a dollar for dollar reduction in the lesser of the sales price or appraised value.  Common examples of seller concessions are:  Decorator Allowance, Carpet Allowance, Landscape Allowance etc. If you see the word allowance, it is a huge red flag.

 

However, seller concessions can also take the form of material goods or services that have value.  Some recent examples we have seen:  2007 BMW; Tracker Bass Boat; 2 Snow Mobiles; Riding Lawn Mower; Dining Room Set; 1 Year of Lawn Service; Paid Vacation to Hawaii post close; etc.  All of these items have value and would result in a dollar for dollar reduction in the lesser of the sales price or appraised value if they are not removed from the contract.

 

One of the more common questions regarding seller concessions are items such as the refrigerator, washer-dryer, portable dishwasher and so on.  There is no easy way to answer this, however items such as major kitchen appliances are generally not considered seller concessions as long as the appraiser notes it on the appraisal and there is no indication that it is uncommon for the area.  Many contracts already have verbiage along the lines of “included at no additional cost to the purchaser are…”.  This phrase does not guarantee an item is not a concession, but it is a help and I highly recommend it to real estate agents.  

 

So, when you receive purchase contracts, please take a moment to review the terms of the agreement.  If you see anything being paid outside of the normal contribution toward closing costs, pre-paids, or discount points, you may have a seller concession.

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