Seller concessions help people buy homes! The name implies that the Seller actually pays the buyer or makes a concession in the purchase price to benefit the buyer. In essence that is true, but in reality the Seller isn’t doing anything other than allowing the buyer to borrow more money to cover closing costs. Lets look at an example to illustrate the point.
The seller of a home lists their house at $210,000 and gets an offer on the house. The offer is negotiated so the seller is netting $200,000 and the seller accepts that price. When the contract is tendered the selling price is $206,185 with a 3% seller concession. The seller will net exactly $200,000, but since the contract price is $206,185 the lender for the buyer uses THAT number to determine the loan amount and includes the credit to the buyer of $6185 toward the required amount of money that the buyer must bring to the closing, effectively allowing the buyer to borrow those closing costs.
The home must appraise for the full purchase price. Usually that is not a problem, but many lenders will not allow the purchase price to exceed the highest price the home was listed for. When I list a home I usually suggest that the seller start a bit on the high side in order to accommodate a potential buyer using a seller concession. We then adjust the price quickly so we don’t miss any potential buyers at a lower price.
Here’s where most Real Estate Agents get messed up. The math necessary to determine the correct gross sales price looks like this.
Final Sales Price = net to seller / (1 – seller concession)
Now lets apply the above numbers. Final Sales Price = 200,000/ 1-3% (which is .97)
Final sales price = 206,185.57.
If it were a 6% seller concession then the formula would be Net to seller/(1-6%) = 212,765.96 or Net to seller/ .94 = 212765.96
If you are looking at a contract and want to determine what the seller is supposed to net the formula looks like this; Seller net = Gross purchase price x (1-seller concession) so if the seller concession is 6% the formula would be;
Seller Net = Gross purchase price x (1- .06) or Seller Net = GPP x .94
Many Realtors want to multiply the seller net by the seller concession then add it to the seller net. When you do that you will rob your seller of the price they agreed to. What that usually means is that it will come out of your commission check. Using the example from above the final purchase price would be 212,000 but when the bank does the math correctly and takes the final purchase price and multiplies it by 6% they get a seller concession of $12720 and the seller nets $720 less than they thought they were getting!
This calculation is done incorrectly on MOST contracts! Learn how to do it correctly and keep that seller concession in YOUR pocket! If you are a seller then you need to know how to do this math so when the other realtor messes it up the miscalculation doesn’t come out of YOUR pocket.
Become an expert at what you do! Your clients will be loyal forever!
