Seller Contributions – First Time Home Buyers Advantage

Today’s real estate market is weird. Everybody is saying it. What’s so weird about it? My guess is that Seller Contributions have made their way into making the market weird for the real estate investor. Let me explain.

  • The tables are turning from the high demand that brought on the Sellers’ Market to now the market of Seller Contributions.
  • The demand has softened because of the increase of interest rates over the past year.
  • The higher interest rates have caused erased the frenzy shopping phenomenal that we experienced just two to three short years ago.
  • Higher interest rates means that there are fewer buyers who qualify to buy their first house.
  • First Time Home Buyers are told to ask for a Seller Contribution in their offers
  • Oregon Housing prices are high which presents a challenge to the first time home buyer

The Remedy: Seller Contributions

Real estate professionals (the real estate brokers and the mortgage brokers) have become creative in getting the buyer to qualify for the mortgage. Seller Contributions have become widely used in the negotiation of buying a house. Seller Contributions are in favor of the buyer, not the seller. The First Time Home Buyer basically has to take advantage of this caveat.

What is Seller Contributions?

The term that has developed and is strongly used today is “Seller’s Contributions” or “Seller’s Concessions”.

This is a caveat added to the Buyer’s Offer – saying that the Seller must concede to giving back to the Buyer X-amount of dollars. This generous amount is then applied to the buyer’s down payment or loan cost! This helps the first time home buyer to qualify.

Seller Contributions are also sometimes referred to as seller Concessions, and causes the seller to agree to pay the buyer for the financing costs for the buyer of the home. When buying a home, there are many financing costs that must be paid for in order to close on the sale. – Mortgage

Mortgage underwriters have adopted guidelines for these Seller’s Contributions.

  • Attached is a PDF showing the how much a seller can pay toward the closing cost per each type of mortgage. Because the mortgage underwriters are accepting these donations from the seller, the Buyer is using it, especially the first time home buyer!

Last month I sold a house to a borrower who had FHA financing. The Seller Concession that I gave to the buyer was a shocking 6% of the price!Grace Widdicombe Oregon House Flippers

The real story about the Seller Contribution is that it doesn’t show up in the Comparable Market Analysis.  The “Sold” Price shown is the Price before the seller’s discount.  Therefore, If I sell a house at $400,000 and the buyer gets 9% discount which is subtracted from their closing cost, my true sale price was $364,000.  But the market data shows that I sold it for $400,000. That’s a whopping $36,000 difference!

Therefore, the House Flipper Real Estate Investor must factor in Sellers Contributions when calculating the Sold Market Data, and their ultimate sale price.  

Case Study: House needs to be flipped. Seller will sell at the county’s assessed market value from last year, which equals $390,000. The After Repair Value for the house is $404,000. At the sale price, there is no room for profit, holding costs, loan costs, or even for the repairs! Therefore the house flipper must determine how much he or she can offer for the house.

ARV = $404,000 Repairs = $20,000

ARV x 75% less repairs = $280,000

However the ARV is tainted by Seller Contributions which are not reported. The true ARV would be in the realm of $379,760 (with 6% seller contribution)

True price that Flipper can offer: $380,000 x 75% – $20,000 = $265,000.

The Truth about Seller Contributions in this case study is a $15,000 problem for the House Flipper!

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