High interest rates are causing declining home sales across the United States, so if you’re trying to sell your home right now, you could be in for a long, frustrating wait.
One way to speed up the process is by offering incentives that make your home stand out against the competition.
There are two major ways home sellers can sweeten the deal for buyers. You can either offer them savings at the closing table or reduce the price of the home.
Read on to explore the intricacies of seller credit vs. price reduction and how they impact your home sale.
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Understanding Seller Credit
Seller credit is also known as closing credit. It refers to savings that the buyer might enjoy when closing on a real estate sale.
What Is Seller Credit?
The most common type of seller credit relates to home repairs. If a home is found to be lacking during a home inspection, the seller may agree to pay for major repair costs on behalf of the buyer.
Other common concessions include title insurance, broker points, loan origination, and appraisal fees. In most cases, seller concessions are limited to between 2% and 9% of the purchase price of the home, depending on the down payment.
Both parties must approve the amount of the seller credit before closing day.
In a way, seller credits are money that the seller pays the buyer to entice them to close on the deal. They can help make a property more appealing to buyers and speed up the closing process.
It might seem like seller credits are for the benefit of buyers only, but they offer pros and cons for both parties, as follows:
Pros of Seller Credits
Seller credits reduce the cash that buyers need to close the transaction, i.e., they present a direct cash saving. In this way, they improve the buyer’s cash flow by making funds available for other expenses like moving costs.
Mortgage programs often have specific requirements for the buyer’s closing cost contributions. Seller credits may help them meet these requirements.
Seller concessions can be a good bargaining tool for both sellers and buyers during negotiations and help them reach a mutually beneficial agreement.
Cons of Seller Credits
Sometimes sellers increase their selling price to compensate for anticipated seller credits. This means buyers end up paying more for the home than they should.
That’s because seller credits reduce the seller’s net proceeds from the sale. They may need this money to purchase their next house.
Appraisers take seller credits into account when valuing the home. Significant costs for concessions may inflate the price of the home, causing an appraisal gap.
A buyer may cancel their offer or negotiate with the seller about who’s going to pay the difference in the home’s price and appraisal value.
Understanding Price Reduction
Price reductions are a common sales strategy in every industry. In real estate, it means selling your home for a lower price to entice buyers.
What Is Price Reduction?
A price reduction is usually a fixed dollar amount or a percentage of the initial listing price. This tactic has obvious benefits for buyers, but it also has advantages for sellers.
Advantages of Price Reductions
For sellers, lowering a home’s price can attract more potential buyers who might not have qualified for a mortgage to the value of the original amount. Properties priced at below market value always attract more buyers.
Reducing the price of a home positions your property as having better value than the competition, creating a sense of urgency that may drive a faster sale.
Lower prices are more likely to align with the market value of a home, thus minimizing the risk of appraisal complications and issues during closing.
Disadvantages of Price Reductions
When you reduce the price of your home, you’ll end up with less money in your pocket. This can hamper your ability to purchase a new home.
Lowering your price can create the perception that you’re having difficulty selling a home due to undisclosed problems with it. This can lead buyers to question the condition of the home.
When you’ve already reduced your sale price, you don’t have much room left to negotiate.
Seller Credit vs. Price Reduction: A Comparative Analysis
Seller credits and price reductions can affect several aspects of home sales. Let’s explore the impact of each one:
Closing cost credits help ease the financial burden on sellers during closing, making homeownership accessible to a wider pool of buyers. It’s particularly appealing to those who have limited funds for closing expenses.
A price reduction suits buyers who are looking for a good deal or who have a price limit. It can also create a sense of urgency among buyers and the perception of offering good value.
Cash buyers benefit the most from a price reduction, as the savings are minimal when spread over many years for mortgage buyers. Mortgage buyers benefit more from the direct savings resulting from lower closing costs.
There’s an added psychological difference between a reduction and seller credits. For some buyers, a price reduction makes it seem like the home is damaged goods, while they view a seller’s credit as an extra incentive.
Financial Implications for Sellers
Closing cost credits affect the seller’s net proceeds from the sale of a home. When you agree to pay some of the buyer’s costs, you reduce how much you get out of the sale.
Seller credits can vary depending on the negotiating process between buyer and seller. The seller will always end up paying a reduced amount for closing costs.
Reducing the sale price of a home means the seller gets less money from the sale without any gray areas, like calculating repair costs.
From a tax perspective, buyers may pay less tax if they’re eligible for capital gains tax on the profits from the home sale. A price reduction may also help buyers avoid capital gains tax altogether if they end up earning less than $250,000 from the sale.
You must evaluate the financial implications of both strategies in conjunction with your plans and financial obligations.
In a buyers’ market, or any time there’s increased competition for houses, closing cost credits can help your listing stand out. Many buyers find closing costs prohibitive, so the potential to save on these expenses is a drawcard for them.
Price reductions are effective in any market, but they’re especially useful when your home’s been listed for a long time in a slow market.
Reducing your sale price can stimulate interest in your listing and encourage buyers to act swiftly.
Most buyers search online for their next home nowadays. Both closing cost credits and price reductions can generate more interest in your property thanks to online search filters.
Listing your home with the seller’s credit will help buyers find it more easily, while even a small price reduction could place your home in a cheaper search category. For instance, if buyers are searching for homes under $250,000, decreasing your price by $5,000 from $255,000 will allow it to appear in this category.
Price reductions may align a home’s price more closely with market value. This helps streamline the mortgage approval process and limit the risk of appraisal complications from an inflated sale price.
Seller’s credits can have a big impact on appraisals if they create an appraisal gap. Appraisers take these costs into account when valuing the home, so they can cause problems if they push the home’s price up by too much.
Case Scenarios and Decision Making
Several different factors can impact whether a seller is likely to offer closing credits or a price reduction when selling a home. These are:
The Seller’s Position
Home inspections typically take place toward the end of the home sales process, just before finalizing the deal. If the inspection reveals that major repairs are necessary, the seller has a few options, depending on their goals.
They can keep the house, carry out the repairs, and try to sell it later or arrange the repairs themselves. Both of these options delay the sale and might not benefit sellers who need to move on or who are negotiating the sale of another home.
In these cases, it’s often a better option for sellers to lose some money on the sale of the home by paying some of the closing costs from the sale proceeds. For instance, if the seller receives $200,000 for their home, they could take $5,000 out of that to pay for necessary repairs without impacting the asking price of the home.
Overall, offering credit on closing costs can speed up the sale process while satisfying both the seller and buyer.
Seller credits are not tax-deductible.
When the seller offers a price reduction instead, they might save on capital gains tax or manage to avoid it altogether, depending on their circumstances.
The Buyer’s Financial Health
When a buyer asks for a closing credit during negotiations, it might be a tactical move to try and secure a better deal on the sale. In some cases, it can indicate that the buyer is over their head and struggling to cover the closing costs and downpayment.
This can lead to problems during closing and may even cause the sale to fall through. Sellers who want a fast sale will be more willing to allow larger concessions.
Home Value and Listing Strategy
In many cases, the seller will strategically adjust their price to accommodate closing credits. So, if the cost of repairs amounts to $10,000, they may tack that onto the price of the home.
So, on a $400,000 home, the purchase price would increase to $410,000, which could exceed the home valuation. Either the seller or the buyer would have to make up this valuation gap, and both would pay closing costs on the higher price.
Market conditions can also impact the buyer’s strategy regarding closing credits. In times when there are many homes for sale and few buyers, it’s in the seller’s best interest to allow generous credits.
When there’s a high demand for homes, they needn’t agree to any credit.
It’s most common to start negotiations regarding price reductions and seller credits after the home inspection, as both parties will know the value of the repairs at this stage.
This process usually involves a series of offers and counteroffers that depend largely on the seller’s motivations, the current market, and mortgage restrictions. For instance, FHA and USDA loans allow the seller to pay 6% of the closing costs, while VA loans allow for 4%.
Private lenders may allow between 3% and 9% of buyer credits, depending on the size of the buyer’s down payment.
Expert Advice and Best Practices
Realtors agree that seller credits benefit the buyer and price reductions benefit the seller most. In the case of necessary repairs, both buyer credits or price reductions may benefit both parties, provided the costs don’t exceed the closing credit cap.
Sellers who want to sell their home fast must think strategically during negotiations, taking the market, their future plans, and the tax implications of the sale into account.
Key Takeaways and Final Recommendations for Sellers
When comparing seller credit vs. price reduction, sellers must weigh up various options to arrive at a solution that suits them best.
Seller credits can help you increase affordability for buyers, provide flexibility in negotiations, and hasten the sale of your home. They can also reduce your net proceeds, despite a higher listing price for the home.
Price reductions give you the edge in a competitive market by increasing your pool of potential buyers and creating a sense of urgency and value for money. You’ll have little room for negotiations when you reduce your price and net less money in the end.
You must consider your goals, financial obligations, and circumstances in depth before you employ either of these strategies to help you sell your home.
Skip the Negotiations and Sell Your Home Fast
If you’re a home seller who needs a fast sale, you may have fewer concerns about the pros and cons of seller credit vs. price reduction, as long as you can get your home sold quickly.
In these cases, reaching out to a cash investor is often the ideal solution for you. iBuyer can put you in touch with a wide range of serious cash buyers who will buy your home fast.
They cover all the repair costs and can close on the sale within days. Enter your address on our website to find out how much a qualified buyer is willing to offer you for your home.