How Seller Concessions Impact a Home’s Appraised Value

Seller concessions are costs the seller agrees to cover for the buyer’s closing fees on a home purchase. As purchasing a home is a big financial investment, negotiating seller concessions can help homebuyers with closing costs, which typically amount to 3% or less of the purchase price and are paid out of pocket by the buyer.

In balanced housing markets where housing supply is not an issue, seller concessions are not an uncommon ask from buyers. In some cases, a seller may prefer to make a concession instead of a reduction to the sales price. 

While this might sound like a win-win, it’s important to know how seller concessions can impact the appraised value of the home being sold. Read on to learn what seller concessions are, how they are used in real estate transactions, and how they may impact the home’s appraised value. 

What Are Seller Concessions? 

Seller concessions are anything that the seller agrees to contribute to the buyer’s closing costs. They’re considered concessions because the seller agrees to cover costs the buyer is typically responsible for paying themselves. 

A seller might be willing to cover some or all of the buyer’s closing costs if:

  • They are eager to sell.
  • The home has been on the market for a while.
  • They don’t want a price reduction.

What Closing Costs Do Seller Concessions Cover?

During your home buying process, your lender will give you a loan estimate, which details your estimated closing costs. You can then work with your real estate agent to decide which of these fees to ask the seller to cover.

Below are closing costs that the buyer typically pays but can also be covered as seller concessions, where the seller would pay for one or more of these expenses: 

  • Professional appraisal fee: The cost of having a licensed appraiser determine what the home is worth based on a comparative market analysis, square footage, curb appeal, and local market conditions.
  • Home inspection fee: The cost to have a licensed home inspector determine any issues with the home.
  • Mortgage points: Also referred to as discount points, these buy down and reduce the interest rate on your mortgage, either temporarily or permanently. 
  • Property taxes: Prepaid property taxes through the end of the year are due at closing.
  • Title insurance: This will protect you and your lender if someone makes a claim on the home’s title.
  • Attorney’s fees: Some states require an attorney to review closing documents in real estate transactions. 
  • Loan origination fees: This is the lender’s cost for processing the home loan.
  • Recording fees: These are the cost of documenting the home’s purchase with the local government.

One of the most common seller concessions in a rising interest rate environment is mortgage points or discount points. This is when the seller agrees to pay to permanently buy down the buyer’s interest rate, which reduces their monthly payment over the life of the loan. 

Another seller concession that’s making a comeback is a temporary buydown. A temporary buydown is paying points to buy down the interest rate for a certain period of time. After that point in time, the rate goes back to normal.

A 2-1 buydown is an example of a temporary buydown, which lowers the interest rate by 2 percentage points for the first year of the loan, and 1 point in the second year. These rate reductions mean the monthly mortgage payments are lower during the buydown period. 

How Do Seller Concessions Impact the Appraised Value of a Home?

Seller concessions can impact the appraiser’s adjustments when determining value, which can affect the property’s appraised value. Gerry Allard, a lead appraiser with Kairos, explains how this works: 

“If a home is listed for $450,000, remains on the market for the typical amount of time, and sells for $455,000 with $5,000 in seller concessions, the appraiser would more than likely interpret that the concession was added to the sale price. 

“If it’s determined the sale price would have been lower without these concessions, then an adjustment is made by the appraiser. This scenario would leave the borrower coming up with more money out of pocket.

“On the other hand, if the property were listed for $450,000 and sold for $440,000 with $5,000 in concessions, the appraiser would likely consider that as part of typical negotiations between buyer and seller and not a reflection of an alteration to the sale price.”

According to Fannie Mae: “Adjustments must reflect the difference between what the comparable actually sold for with the sales or financing concessions and what they would have sold for without the concessions so that the dollar amount of the adjustments will approximate the reaction of the market to the concessions. If the appraiser’s analysis determines that the market’s reaction is the full amount of the financing concession, a dollar-for-dollar adjustment is acceptable.”

“This is very much the interpretation and determination of the appraiser,” Gerry adds. “Some appraisers automatically make an adjustment for any concessions reported for comparable sales. This is often a misunderstanding of the guidelines. There must be some evidence to support the position that the concession materially impacted the sale price. The appraiser should investigate the circumstances surrounding the comparable sale, with reported concessions, before making any adjustment.”

Additionally, there may be concessions provided by the listing or selling agent, classified as “distributions” to the buyer, which come out of the agent’s commission. These concessions have nothing to do with the sale price and would not be a factor in determining appraised value. 

The conclusion: Seller concessions can impact a home’s appraised value and need to be thoroughly vetted by the appraiser before being placed in the final appraisal report.

Fannie Mae further states: “The appraiser must provide appropriate comment(s) reflecting the logic and reasoning for the adjustments provided, especially for the characteristics reported on the appraisal report form between the Sales or Financing Concessions and the Condition line items. A statement only recognizing that an adjustment has been made is not acceptable.” 

Click here for more details on Fannie Mae’s requirements for appraiser adjustments to comparable sales and concessions.

Questions on Seller Concessions?

If you have questions, drop us a comment! At Kairos Appraisal, our 4.9-star average customer rating is attributed to our customer service, our technology, and our talented team of appraisers. For more about the appraisal process, click here to read additional articles.

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Alex Todak