Buying Smart in Today's Market: How Seller Concessions Can Lower Your Payment

Seller concessions are one of the most underused tools in today's market. Learn how buy-downs, closing cost credits, and smart negotiation strategies can make homeownership more affordable from day one. 

Transcript

SPEAKER_01 0:00

Welcome back to the Idaho Life Show. Garrett Thill and Shelby Matson, your local market experts with Idaho Life Real Estate in Meridian here with you on KIDO. And before the break, we were talking about why waiting for that magic rate, that number that you have in mind to come back has been an expensive strategy for a lot of folks. Now, I I want to get into what the actual workaround looks like, and Shelby kind of teased about that a little before the break and what every buyer in this valley should be asking their agent and their lender about.

SPEAKER_00 0:31

This is the part of the conversation I love because it's where buyers go from feeling stuck to feeling powerful. Concessions. Concessions. Yes. Let's just say the word out loud. Seller concessions. That is the move.

SPEAKER_01 0:46

Yeah, those seller concessions. So let's define it for the listener who hasn't bought, you know, in a few years, or, you know, maybe they're looking at buying right now, but they just haven't had that conversation yet. So a seller concession in layman's terms here is when the seller of the home they agree to use a credit or credit a portion of the sales price back to the buyer at closing. And that money can be used to cover closing costs, prepaid items, or this is the big one to buy down the buyer's interest rate.

SPEAKER_00 1:15

That's huge. And even in this hot market we are in right now, sellers are agreeing to this all of the time. They are absolutely doing this. It's not unusual. It's not going to hurt the seller's feelings to ask. It is happening in almost every price point here in the Valley.

SPEAKER_01 1:32

All right. So, Shelby, let's talk through what kind of a two-one buy down actually is because the name sounds, it sounds technical, a little scary, but the structure is actually really simple.

SPEAKER_00 1:41

Yeah, you're right, Garrett. It does sound daunting, but it's a simple, great tool. A two-one buy down, the two and the one are the numbers of percent percentage points your rate is knocked down for the first two years. So in year one, theoretically, your interest rate is two full percentage points below your current rate.

SPEAKER_01 2:02

I love that.

SPEAKER_00 2:02

Right. In year two, it's one percent point below. And in year three, you're at the regular rate for the rest of the loan. Yeah.

SPEAKER_01 2:11

So if your loan rate is, let's say, six and three quarters. Yep. Year one, you're looking at paying as if your rate was at four and three quarters. I like it. Yeah.

SPEAKER_00 2:19

Mm-hmm. And which on a $450,000 house is a payment that feels very different. We're talking about hundreds of dollars a month, real money flowing back into your bank account every single month of one year.

SPEAKER_01 2:32

Yeah. And year two, your rate steps up to five and three quarters, you know, using this example and still significantly below market, but still meaningful monthly savings.

SPEAKER_00 2:42

Yes. And to put a real dollar figure on that, on a $450,000 loan, dropping the rate two full points in year one is in the neighborhood. Are you ready? $570 a month off the payment. Significant. That's $570 every month for 12 straight months. Real money.

SPEAKER_01 3:00

I mean, that's a that's a car payment. That's daycare money. I mean, that's that's two weeks of groceries if you're lucky right now.

SPEAKER_00 3:06

If you're lucky, yeah.

SPEAKER_01 3:07

You know, every month, you know, that money, $570 going back into the buyer's bank account.

SPEAKER_00 3:12

Yes. And year three, you're at the regular rate, six and three quarters in this example specifically. And that's where you stay for the rest of the loan unless you refinance, which, given where most economics think rates are heading over the next three to five years, there is that possibility you refinance before you ever hit year three at the full rate.

SPEAKER_01 3:32

Yeah, there's that definitely that possibility. We don't know for sure we don't have that crystal ball, but that's what most uh people are saying. So that's the play, anyways. You you get that discounted rate while the broader market kind of settles down over time here. And if the rate does come down, you just refinance and lock in that lower rate permanently later on down the road.

SPEAKER_00 3:50

Yeah, Garrett, it's a hedge. So the buy down protects you while you wait. The refi protects you if and when the interest rate market does turn. Yeah.

SPEAKER_01 3:59

Now there's a cousin to this, and we probably should mention it, which is the permanent buy down. So instead of using that $10,000 concessions that we talked about getting from that seller to lower the rate for that two years using that two one buy down, you can use it to buy down the rate permanently. And in what your lender calls discount points or like sometimes just call it points.

SPEAKER_00 4:20

That's right. And that is the right move for some buyers. If you know you're going to stay in this home a long time and you just want that peace of mind, you don't even want to ever plan on a possibility of refinancing. Paying for a permanent rate reduction can pencil out beautifully because the savings compound for the life of the loan.

SPEAKER_01 4:38

I think you just nailed that perfectly, though. It's just giving you peace of mind. Peace of mind. Don't even want to worry about, we don't even want to think about refinancing. But if it happens, great. If it doesn't, that's okay. So it's really a different calculation, right? The temporary buy down gives you a bigger monthly savings for two years. The permanent buy down gives you smaller monthly savings forever. And honestly, it really depends on the buyer, the loan amount, and how long they're planning to be in that house for.

SPEAKER_00 5:04

This act is exactly the conversation we have with every buyer because the right answer for the family that's planting planting roots in Eagle for the next 30 years is not the same as the right answer for the younger first-time buyer who is buying a starter home in Nampa and expecting to upgrade in five years.

SPEAKER_01 5:21

Exactly. That's exactly what it is. So now there's a third use of concessions that doesn't get talked about enough. And I want to spend some real time on that, Shelby. And concessions, they can go towards the closing cost, just directly, period, closing costs. Just towards that, which means the buyer comes to the closing table with less cash out of pocket.

SPEAKER_00 5:40

This matters so much for the first-time buyers or for the buyers who are really tight on funds in their bank because closing costs between title, escrow, prepaids, the lenders' fees, we're often talking about three to five percent of the purchase price.

SPEAKER_01 5:54

It can get significant. It really can. And on a $450,000 home, that's somewhere between $13,000 and $22,000 in cash that you that you you know used to have to bring to the closing table on top of the down payment. So if the seller is giving you $10,000 of that, and that's $10,000 that stays in your savings account instead of just going towards closing costs.

SPEAKER_00 6:17

Yeah, I mean, this can become your emergency funds.

SPEAKER_01 6:19

Or that too, yeah.

SPEAKER_00 6:20

Right. Or your new house furniture money. I mean, that's where I'm going with it. Or the rainy day cushion, that means you sleep better the first year.

SPEAKER_01 6:28

That's right. And to be honest, I mean, that sometimes is the right move. And not every buyer needs a buy down. Some buyers just need that $10,000 to cover closing costs with less stress. And we see a lot of that right now with buyers, especially the first-time buyers, which is a fantastic move. So the flexibility of using this concessions on how you want to use it is really the point. You don't have to use the credit for one specific thing. I mean, you can really design it around to what you actually need as the buyer.

SPEAKER_00 6:57

Yes. And Garrett, there's one more piece to add. We are seeing concessions of 3% to 6% of the purchase price negotiated all over the valley right now. On a $450,000 house, 3% in negotiated credits is $13,500. That's a lot of money. 5% is over $22,000. These are not little numbers. This is the difference between a buyer feeling financially stretched and feeling comfortable during their first year of homeownership.

SPEAKER_01 7:26

And what loan program you're using too, it definitely can matter. So conventional loans, they do cap concessions on what you're allowed to get based on your down payment percentage. So how much you're putting down is the allowance that you're allowed to get back. And FHA loans, here's the cool part. FHA loans, which is very common right now, especially for the first-time buyer, maybe second time buyer, they allow up to 6% back coming back from the seller. And then VA loans also fantastic. They're anywhere between four to six percent max, depending on kind of how you use those concessions, where that money goes towards.

SPEAKER_00 7:57

And this is another reason we like to get the lender into the conversation early, because the concession we ask for has to be allowed under the loan program. The structure has to make sense for what the buyer is actually doing. And once we know the parameters of that said loan, we know how to write the offer. Yeah.

SPEAKER_01 8:15

And we're not asking, you know, for the maximum every single time either, right? You know, the right concession depends on the buyer, the house, what the seller is realistically expecting. Uh, you know, it kind of depends on how long the house has been on the market for, if it's an opening weekend or if it's been on the market for a month or two. So asking for too much, it can blow up a deal. So asking strategically for the exact number that we need to fund the buy down or the closing cost, that gets accepted.

SPEAKER_00 8:40

Which gets us to the bigger conversation, the strategy. Because every buyer's situation is completely different. And the question isn't whether to ask for a concession. The question is what do we actually ask for and how do we structure the deal to actually get it?

SPEAKER_01 8:56

And that is the conversation that's coming up after this break here, Shelby. So I want to spend some real time on it with you because this is the conversation that most buyers never have with their agent. And it changes the math on every offer that they write.

SPEAKER_00 9:10

Don't go anywhere. When we come back, we're going to talk about the surge that's waiting on the other side of a rate drop. Why getting in now is the smarter move and the price versus concessions conversation we have with every single buyer. You're with Garrett Thill and Shelby Mattson on the Idaho Live Show, Real Estate and Community. We'll be right back.