Would You Rather Get $15K Off the Price or $15K Back at Closing?

Question

I always assumed I’d take the lower purchase price, but say you negotiate $15K after the inspection.

Option one: seller drops the price by $15K.

Option two: price stays the same, but you get a credit at closing and keep more cash in your pocket for the rehab.

Obviously the lender has to allow it, but assuming both structures work… I’m not sure the price reduction is automatically better anymore. For people who’ve had this choice, which one do you usually take? I feel like having the cash available on day one might matter more than saving a little on the mortgage.

Amir Twig · Answer

Ali, good one, and the real answer is a framework, not a default, because both replies above are right in different situations.

Joseph's right that if cash-to-close is your binding constraint, the credit usually wins. The payment difference from a $15k price cut is small (~$80-95/mo at today's rates, and you'd have only financed part of that $15k anyway), while $15k in your pocket on day one is real, especially for rehab. So for a flip, or anytime cash is tight, take the credit.

But three things flip it toward the price reduction:

- Concession caps. Lenders limit seller credits by loan type and down payment (conventional owner-occ can be 3-6%, investment property is often capped around 2%). $15k might blow past your cap, in which case you literally can't take it all as a credit. A price cut has no cap.

- Appraisal risk. A credit keeps the contract price high, so the appraisal still has to support the higher number. A price reduction lowers the bar the appraisal has to clear, which matters in a softer market.

- Long holds compound. A lower price means a lower loan balance forever, lower lifetime interest, usually lower property taxes (assessed on price), and a lower basis. On a 30-year hold those beat a one-time $15k of cash. On a flip, they don't matter.

So: credit if you're cash-constrained or flipping, AND it fits the concession cap, AND the appraisal clearly supports the price. Price reduction if you're a long-term hold with enough cash, or you're worried about the appraisal, or the credit exceeds the cap.

Which is your binding constraint on this one, cash to close or long-term return, and is it a hold or a flip? That's what actually picks it.

Crystal Smith · Answer

It depends on the the type of loan and what you plan to do with the property, buy & hold or fix & flip.....  What we do is run a financial analysis to determine which option has the greatest impact on our ROI.

Joseph Cacciapaglia · Answer

This is a situation I've been in several times, and so have many of my clients. I almost always opt for a credit over a price reduction, if and when it's allowed by the lender. The difference in payment from a small price reduction is almost negligible, but having to bring $15k less cash to closing usually isn't.