Imagine this scenario: you’re purchasing a house and you want to offer no more than $450,000.00, because it needs a new kitchen. You got an estimate that it will cost $15,000.00 to install it. The seller does not want to take less than $465,000.00. The seller then proposes that you pay the $465,000.00 and s/he will install your kitchen. Why would the seller want to do that? Answer: maybe the seller works in construction, or maybe s/he comes from a family of people in the construction business, and can get your kitchen done for let’s say $7,000.00. Both sides come out winners. You get your new kitchen before closing, without having to bother with workers dirtying your house, and the seller gets $8,000.00 more than if s/he sold the house to you for $450,000.00. This may have been the rationale for the “seller concession.”

But what if you pay the $465,000.00 and the seller pays $15,000.00 of your closing expenses. Where is the sense in that to the seller? Why not reduce the price to $450,000.00? There is no value to the seller to pay $15,000.00 of your expenses. S/he comes out with the same $450,000.00. But, in the hands of bankers, this made sense. This appears to have been the birth of the seller concession, as it exists today.

Intrigued and irritated by this pernicious custom, I endeavored to research its origin. So far, I have come out empty-handed. Not only have I not been able to find the “inventors” of this senseless farce, but I have no answer as to why it’s still out there.

Let’s use an example:

Purchaser is willing to buy and seller is willing to sell a house for $450,000.00. But the buyer only has $25,000.00 for everything, down payment and expenses. Let’s say that lenders require a minimum of 5% from the buyer and the lender will finance the balance of $427,500.00. On $450,000.00, the 5% down payment will be $22,500.00, plus about $15,000.00 for expenses, for a total of $37,500.00. Our buyer cannot buy this house with only $25,000.00.

But, what if we have the seller pay $15,000.00 of the buyer’s expenses? The result is this:

$465,000.00
-$441,750.00 mortgage (95% of $465,000.00)
=$ 23,250.00, our buyer’s 5% down payment

The seller will pay the closing costs of approximately $15,000.00. You can now make this deal happen with the $25,000.00. Note that the price remained $450,000.00. The lender financed $441,750.00, which allowed the purchaser to borrow the amount needed to complete the transaction. The seller didn’t pay anything. The seller walked away with the same amount that the seller was willing to sell the house for: $450,000.00.

But, why would a seller want to do that if s/he comes out with the same amount of money? Therein is the devil. Why not have the price stay at $450,000.00 and have the lender lend the $441,750.00? That would make more sense, be more accurate and not hide the real price. The charade of the seller concession can misguide a future purchaser looking to buy a similar house in the same neighborhood. His/her research may find that a house in the neighborhood recently sold for $465,000.00, when in reality it sold for $450,000.00.

The New York State Bar Association has wrestled with this issue a number of times, counselling its members to be transparent when a price is increased to accommodate a seller concession, distinguishing situations where the seller concession is an economic decision of the seller to give the buyer, and the situation where the price from the initial negotiation is increased solely for the purpose of obtaining higher financing from a lender. But, a “pure seller concession” hardly exists. This would be a situation where, for example, the seller agrees to perform certain work on the house, or give the seller a credit at closing for not having performed the work. Or where something happens to the house after the contract is signed, and the seller gives a credit to the buyer at closing to compensate the buyer for the cost of making the repairs and/or improvements.

I would venture to say that a great percentage of residential real estate transactions where a seller concession exists are not “pure seller concession” transactions. They are, for the most part, transactions where the purchaser does not have sufficient monies for the completion of the purchase and needs to borrow the deficiency from the bank. From the initial negotiations, the price is increased for the sole purpose of obtaining additional financing from the bank.

In real estate, as is probably the case in other lines of business, customs arise which never made sense, and become the norm rather than the exception. Years pass and the “thinkers” who originated the practice disappear, but the practice stays. No one dares question it, or even try to analyze why it’s there, even when it makes no sense.

I say: let’s reason things out and eliminate any practice, rule or program that just makes no sense. Let the price be the real price, and let the lender lend whatever it wants to lend.

PS. Oops! I forgot: most lenders don’t like a pure seller concession. They hardly approve them. But the lenders are not to blame for this, even if they may have been responsible for its creation. The question may arise in your mind: then, who’s responsible for ending it? Answer: somewhere south of New York.