The math behind seller concessions, lender limits, and why appraisers sometimes get involved
Every seller has had this moment.
An offer arrives. The purchase price looks promising. Then comes the request for seller concessions.
Suddenly, the offer doesn’t look quite as attractive as it did a few seconds earlier.
“Wait a minute,” the seller says. “If they’re asking me for $8,000 back, aren’t they really offering $325,000?”
It’s a fair question. After all, if the contract price is $333,000 and the seller is contributing $8,000 toward the buyer’s costs, the seller will walk away with less money than they would have received without the concession. From the seller’s perspective, that concession feels a lot like a reduction in price. In many ways, that’s exactly what it is, but that isn’t where the story ends.
The reason concessions create confusion is that buyers, sellers, lenders, and appraisers are often looking at the same transaction while trying to solve different problems.
Why Sellers Roll Their Eyes at Concessions
Most sellers evaluate an offer by focusing on a single number: their net proceeds.
How much money will actually end up in their pocket at closing?
That’s a perfectly reasonable way to evaluate an offer. Whether the concession is being used for lender fees, title charges, prepaid taxes, insurance, or discount points, the seller knows one thing for certain: money is leaving their side of the transaction.
As a result, many sellers immediately translate a concession request into a lower offer.
A $333,000 offer with an $8,000 concession starts looking a lot like a $325,000 offer.
From a net-proceeds perspective, that logic is difficult to argue with.
The challenge is that the buyer may not be trying to solve the same problem.
The Buyer Isn’t Trying to Lower the Price
Many buyers who request concessions are not struggling with the monthly payment.
They’re struggling with cash-to-close.
Closing costs can include lender fees, title charges, escrow deposits, prepaid property taxes, homeowners insurance, and a variety of other expenses that add thousands of dollars to the amount a buyer must bring to closing.
A buyer may qualify for the mortgage. They may qualify for the payment. They may even qualify for the purchase price. What they may not have is an additional $8,000 readily available in their bank account. In that situation, a price reduction and a concession can produce very different outcomes.
If the seller lowers the price by $8,000, the buyer’s monthly payment decreases slightly. The loan amount decreases slightly. But the buyer may still need nearly the same amount of cash to complete the transaction.
A concession, on the other hand, may reduce the amount of money the buyer must bring to closing by thousands of dollars. For some buyers, especially first-time buyers, that difference can determine whether the purchase is possible at all.
Why the Lender Cares
At this point, many people ask a reasonable follow-up question:
Why doesn’t the buyer simply increase the purchase price and ask for an even larger concession?
Because the lender gets a vote.
Most loan programs place limits on how much a seller can contribute toward a buyer’s costs. Those limits vary depending on the type of loan, occupancy status, and down payment, but they all exist for similar reasons.
Lenders want confidence that the contract price reflects the property’s market value. They also want buyers to have meaningful financial participation in the transaction.
Without those guardrails, buyers and sellers could theoretically increase the contract price while using concessions to move larger amounts of money back to the buyer at closing.
Lenders generally have no objection to concessions themselves. They simply want to ensure the transaction remains supported by both the property’s value and the buyer’s financial investment. That’s why seller concessions are allowed, but not unlimited.
Then the Appraiser Shows Up
Suppose a seller wants to net roughly $325,000.
A buyer needs help with $8,000 of closing costs.
The parties agree to a $333,000 contract with an $8,000 concession.
On paper, everyone may appear satisfied. The seller receives the price they wanted. The buyer receives help with closing costs. The lender approves the financing structure, but there is still one more participant in the transaction. The appraiser.
The buyer and seller can agree to any contract structure they choose. The lender can approve the financing. But if the property’s value does not support the contract price, the appraisal can create a problem.
If the home appraises at or above the contract price, the transaction may proceed as planned.
If it appraises below the contract price, the parties may need to renegotiate.
The transaction does not end once buyer and seller agree on the numbers. The property’s value still has to support the structure they’ve created.
So Are Concessions Just a Way to Inflate the Price?
Sometimes a higher contract price and a concession are used together to help a buyer manage cash-to-close requirements. That doesn’t mean value is being created out of thin air.
The lender still has limits. The appraiser still evaluates value. And the seller still decides whether the net proceeds are acceptable.
What makes concessions interesting is that everyone involved is trying to solve a different problem.
Sellers are focused on net proceeds and what they will actually receive at closing. Buyers are often focused on cash-to-close and whether they can complete the purchase. Lenders are managing risk and enforcing loan guidelines. Appraisers are determining whether the market supports the contract price.
Everyone is looking at the same transaction. They’re just asking different questions.
On paper, a $333,000 contract with an $8,000 concession may look very similar to a $325,000 offer.
In practice, those two structures can produce very different outcomes for the buyer, the seller, and the lender.
That’s why the answer to a seller’s question is often both yes and no. Yes, the concession reduces what the seller receives, but no, it isn’t always the same thing as simply lowering the price.
Karen Moeller
STLKaren.com
Karen.McNeill@STLRE.com
314.678.7866
About the Author:
Karen Moeller is a St. Louis area REALTOR® with MORE, REALTORS® and a regular contributor to St. Louis Real Estate News, helping clients make informed, data-driven decisions.
