How SMART investors are utilizing seller concessions for stronger dealmaking
In what is expected to be a continued tight housing and real estate investment market, there are a few tips and tricks that can help investors get some advantages given the current state of mortgage terms and limited housing options.
For those that are on the fence about investing now, or waiting, or just exploring where investors can pick up some points of leverage, the primary area of focus will be in how the deal is financed.
Mortgage bankers and brokers are still very active. I recently explored several top mortgage companies to hang my NMLS mortgage license with and if you have decent credit and a down payment, banks are finding ways to get you qualified. It doesn't quite remind me of 2004-2008 since the borrowers need to have a history of paying their bills on time and provide evidence of the capacity to repay the debt, for investment properties lenders are requiring anywhere rom 10-25% down depending on the loan amount and documentation.
Most of my personal clients are AAA borrowers. Income, assets and credit to qualify, but lenders are providing many more creative solutions to get that loan funded.
For example DSCR, no ratio, CPA letter, P&L Statement, average bank deposits, 1% down for primaries? There is capital in the system to be utilized.
More often than not, the markets follow the money, and not the other way around. Yes, rates are high, but dollar for dollar there are many positive and cash flowing investments to be found, or...made.
A tactic I've been utilizing for buyer(s) recently is the deployment of seller concessions in the form of seller(s) contributions towards buyer(s) closings costs, pre-paids or interest rate buy downs.
On most investment properties this will be limited by the lender to 2%ish of the sales price. On primary or second homes these concession can be anywhere from 6-9%!? Although rarely is it useful or beneficial to utilize (finance) that much additional principal and/or interest.
So how exactly does a seller concession work? It's essentially financing a portion of the transaction by increasing the purchase price by the contribution amount.
For example: A home is listed for $500k. The buyer(s) might offer $515k with a 3% seller concession towards buyer(s) closings costs.
The buyer(s) put the down payment as a percentage of the sales price: $515,000. Instead of the down payment percentage of $500,000 plus the closings costs.
It's not a game changer, but a strong concession can level the playing field a bit. A client recently closed on a $785k purchase with 10% down and a 3% seller concession. $24k cash that the buyer(s) did not have to come up with to close and could be utilized towards the upgrades, furniture and furnishings or mortgage payments until their rental gets up and running.
Concessions are not always an option or ideal. For example on highly competitive properties a concession can make your offer much less attractive. A concession is primarily for the buyer(s) benefit, it can help seller(s) to sell a property but there is really no advantage to a seller accepting an offer with a concession except that it is incentive for the buyer(s) to focus on that property, it makes the terms more attractive.
Concessions are also somewhat difficult to comprehend, since real estate can be a game of telephone, sometimes the transaction is just better off, without attempting to get four parties to understand the numbers.
To help others get a feel for seller concessions I created a lil Acronym for some questions that can help one determine if a seller concession strategy is plausible and what to think about when incorporating one into an offer to purchase:
Sales Price- By increasing the sales price, can the buyer still qualify and what's the out of pocket savings going to be redirected towards? Remember like add-ons to a vehicle purchase purchasers effectively increase the amount of capital borrowed.
Multiple offers- On highly competitive properties, a concession can make your offer less attractive. The net result to the seller(s) is the total price less the concession. An easy way to calculate is to take the sales price and multiply by .97 (if there is a 3% seller concession). This is the gross proceeds to seller, then minus the real estate commissions.
Appraised Value - Is there room for the home to appraise beyond the current listing price? A good CMA (Comparative Market Analysis) is critical. No point in writing offers that have little to no success of being validated by the lender or appraiser.
Rate buy down(s)- In addition to a conventional interest rate buy down, or prepaid interest, certain property types such as primary and second homes can elect for 2/1 or 3/2/1 rate buy downs, or seller paid, prepaid interest. This reduces the rate of interest by 2% the first twelve payments and 1% payments 13 through 24. Here the 2 (two percent) / 1 (one percent year two) name.
Time on market- If the home has been on the market for 30-60-90 days with little or no offers, the sellers have incentive to accommodate a buyer(s) offer.
Concessions are a great way to make deals better, but not at the cost of losing the deal.
Some recent dealmaking examples:
-Albany Triplex with 10% down and 3% seller concession.
-Astoria Duplex with 20% down and 5% seller concession (2/1 buy down.)
-Bandon STR with 10% down and 3% seller concession.
-Rockaway Beach STR with 15% down and $15k seller concession.
Any investors or realtors have some good stories to share on how a seller concession or credit made a deal work or worthwhile?
Real Estate Agent California (#02071578) and Oregon (#201231202)
Quote from @Joseph Chiofalo:
Great article AJ! A sellers concession is a helpful component for some deals to come together. A majority of my most recent transactions have utilized this strategy.
Thanks Joseph. We didn't really use many in the 2000''s at Homebridge Mortgage Bankers did we? I guess there wasn't much need with the 0% downs lol, but would've been nice on my personal purchases.
Real Estate Agent California (#02071578) and Oregon (#201231202)
Thanks AJ! Yes, seller concessions are awesome. I've used them on almost every single deal this year. Mostly to buy down rate, and make payments more affordable for 1-2-3 years for the buyer–until they can hopefully refi at a better rate and get more cash-flow with their LTR/STR investments.
I just accepted an offer on one of my properties today that asked for 3% concessions. Seemed like much but buyer was on the fence before making the offer because he wasn't sure he could make payments. Given how the market is right now, I thought "better safe than sorry" and I'll give him 3% on this deal.
I'll probably get that 3% back on my next purchase anyway ;)