In the current real estate market, when obtaining a bank mortgage is difficult and sellers are desperate, buyers should consider negotiating a “seller concession” into their real estate contracts.
In most real estate transactions in New Jersey, the buyer pays most closing costs, which may include title searches and insurance, survey fees, homeowners’ insurance, taxes, document recording fees, inspections, mortgage charges, etc. With a “seller concession,” the seller agrees to contribute funds towards these closing costs, making the transaction more affordable for the buyer. As a result, the buyer has lower closing costs and is in a better position to begin making mortgage payments.
Seller concessions also benefit sellers having trouble selling their property. The offer to contribute a certain, set amount towards the buyer’s closing costs may not only entice a hesitant buyer to agree to the purchase, but also make it more likely that the buyer will be able to obtain a mortgage and close on the property.
The amount of a seller concession depends largely on the lender, the type of loan and the purchase price. With a conventional loan, a seller concession of three percent of the purchase price is typical. With an FHA loan, the concession is likely to be closer to six percent.
There has been significant confusion in the realtor, lender, and legal communities regarding the ability to use seller concessions. The New Jersey’s Advisory Committee on Professional Ethics has advised that a real estate contract may include a seller concession when the contract “explicitly states that the seller shall provide the buyer with a credit against legal and legitimate costs or expenses related to the sale, which would otherwise be absorbed by the buyer, such as actual closing costs.”
However the Advisory Committee has cautioned in Opinion 710 that a seller concession must not be used to commit a fraud against the mortgage lender. Aid by the attorney to effectuate a fraud would violate Rule 1.2(d) of the Rules of Professional Conduct, which govern attorney ethics. For instance, the parties cannot agree to create a seller concession in return for increasing the purchase price so that the buyer can obtain a larger mortgage from her lender. In that scenario, the lender might be deceived about the true market price of the property and the parties may be perpetrating a fraud on the lender.
Therefore it is always important when negotiating a seller concession to ensure that it is only created to share actual, legitimate closing costs, that the parties negotiate this concession at the beginning of the transaction so that the purchase price is not affected, that it is included in writing in the contract, and that the parties’ attorneys and realtors and the buyer’s lender are aware of the concession negotiated up front.
When a buyer and seller discuss the option of a seller concession from the beginning with each other and their representatives, they can save the buyer money, allow greater financing options, and increase the seller’s chance of a sale.
In today’s buyer’s market, sellers’ concessions are an invaluable option for all parties that can make the difference in closing a sale.
Both sellers and buyers should discuss all of their options with their attorneys, realtors, and lenders prior to entering into a contract. The attorneys at McLaughlin & Nardi, LLC are experienced with real estate transactions and can aid in negotiating your real estate contract. To learn more about what we can do to help, please visit our website or contact one of our lawyers at (973) 890-0004.