Concessions are a great way to make buying a home less expensive. There are a couple of ways you can use concessions and a couple of ways to get the seller to offer them. Here is an overview of concessions.
If you are able to negotiate concessions for the purchase of your house hack, here are the ways I would recommend using them:
- To cover closings costs
Using them to cover closing costs is essentially as good as cash. You were going to have to pay for the closing costs with your own cash. Now the seller is covering those costs. You get to keep that cash and use it for something else.
- To help with the cost of house hacking improvements or conversions
Another great way to use concessions is towards the conversion cost. If you are house hacking a property you more than likely want to convert a space into a bedroom or a basement into a separate unit. These conversions can be paid for with concessions from the seller. To do this you get a bid from a couple contractors to do the work you want done. Then you get a check to that contractor for some or all of the cost to convert the space. Pro Tip: ask the seller to break up the checks to a contractor into a couple of checks so you can do progress payments instead of paying the contractor the total amount upfront.
- Buying the interest rate down
Your lender can help you determine if it is worth buying your interest rate down. A good rule of thumb though: you want to save enough interest in two years to cover the cost of buying the rate down. Why two years? This has been the common number for a long time because people have assumed that at some point in two years rates will be lower than they are today. I’m not so sure that works anymore. So, if you think rates will stay high and not be lower for 3 years or maybe 5 years than make sure the amount of interest you save in that amount of years will be more than the cost to buy it down.
Now all of those ideas assumed you already negotiated concessions. But how does that process work? Here are a few ways you can negotiate concessions with the seller:
- In the initial offer
If the house is listed for 500k you could make an offer for any price you want and also put in the offer that the seller will give $X,XXX.00 amount of concessions to the seller at closing.
A good strategy, if the market is competitive, is to offer above the asking price by the amount of concessions you want.
For example, if the listing price is $500,000 and you want 10k of concessions. You can make an offer for 510k with 10k concessions. This gets you the cash you need now to cover closing costs or make a house hack improvement (bedroom addition or separate unit conversion). It also is the same net to the seller.
Essentially you have locked in a loan for 10k at a fixed rate over 30 years. You threw it into the mortgage. That’s a great deal for you. Especially if you use that money towards a house hack improvement that will generate more rental income.
The one thing to be aware of here is that the higher you go with the offer price the less likely it will appraise.
- During the inspection negotiation period
If there are plenty of items in the inspection that are concerning or a major cost, you could ask for concessions at this point in the closing process.
I wouldn’t start with concessions though. I would start by asking the seller to fix the problem and pay for it. Most sellers don’t want to pay AND manage the problem. They will often counter with a concession.
There are some limits to concessions.
- Limitations about what they can be spent on:
Concessions cannot go towards the down payment. Concessions cannot be kept as cash.
- The amount of concessions you can receive is also limited depending on the type of loan you are using:
VA loans have a maximum of 4% of the purchase price, no matter of down payment.
FHA loans have a maximum of 6% of purchase price regardless of down payment.
Conventional loan limits depend on the amount of the downpayment:
- Less than 10% down = 3% maximum seller concession
- 10-25% down = 6% maximum seller concession
- 25% + down = 9% maximum seller concession