What is Seller Credit to Home Buyers
The Good The Bad & The Misunderstood of Seller Credit
Every week I look for a real estate subject that will help Berks County home buyers and sellers better understand the dynamics of the real estate industry. I did not have to look far this week. It again became apparent that many Berks County home sellers do not fully understand what a seller credit to a home buyer is and how it affects a home sale.
What it is: Seller credit is the practice of crediting a home buyer a percentage or fixed amount of the sale price from the proceeds of the seller's property.
Example: $100,000 Home sale price. Buyer offers the seller $100,000 for the home and requests a 3% seller credit (or $3,000). The net offer is $97,000.
Seller credit is one of the last vestiges of assistance the Government allows to assist home buyers and sellers in crafting a workable deal. In the first half of 2013, there were 847 Berks County homes sold between $100,000 and $200,000. 505 Of those transactions used a seller credit to complete the deal. That is a whopping sixty percent of the transactions! In that same period, 378 homes sold between $200,000 and $300,000. 190 Of them used a seller credit to complete the transaction that amounted to fifty percent.
Many Berks County home buyers have the credentials to purchase a home. The issue is a lack of cash on hand. It is in these cases that a seller credit becomes the most viable option for getting the sale done.
While the seller credit helps fill the buyers' cash necessity it does put additional pressure on the home sale. Put simply, the home has to appraise for the asking price. Example: The buyer and seller agree to a $100,000 sale price with the 3% seller credit, but the home appraises for $97,000. The seller is okay with the $97,000 appraisal because that is what they were getting from the sale ($100,000 Less 3% = $97,000). The issue is that the buyer cannot purchase without the $3,000 seller credit and now it does not exist. Unless the seller is willing to make concessions, the deal may not get done. The seller will have to consider the appraisers' valuation of $97,000 and still give the buyer 3% of the selling price, which would now be 3% of $97,000, or a total of $2,910.00. The seller now is left with a net sale price of $94,090.
There are things for the seller to consider when agreeing to a seller credit. This is where the good real estate professional comes in. Here are a few:
1. Broker commission is often based on the sale price of a property. When the seller accepted the $100,000 for the home, in the example above, they were obligated to pay commission on that amount even though they are only netting $97,000 due to the seller credit of $3,000 or 3%. While it is my opinion that the agent or agents crafted the deal deserve payment on the contracted sale price, not all sellers feel this is fair. Be sure and address the issue of commission on any seller credits with your agent up front.
2. Transfer tax is another cost item that is based off a homes' contracted sale price and not the net after any seller credit. In Pennsylvania, the transfer tax is customarily split between the buyer and seller. In our example, the transfer tax would be an additional $30.00 for both parties.
Almost everyone that has dealt with Berks County home sellers and received an agreement that includes a seller credit has heard the following statement: “Why am I giving the buyer money to purchase my home?”
Answer: To get the home sold! It is a condition of the hopeful purchase transaction. More flexible purchase options can help a home sell easier and for more dollars. To take away the seller credit option is counterproductive. Use all tools in the arsenal. If the Government is allowing it use it. There may come a day when our government says "no more seller credit in real estate deals." If this were to happen, many homeowners would experience a lack of qualified buyers and home prices will suffer for it.
Financing is the obvious one. Low-interest rates also entice home buyers to consider putting less of their capital into the purchase. The buyer may be planning to remodel the home and will use the additional funds to do so. By doing this the upgrades are pre-financed in and the buyer does not have to refinance later and wait for the upgrades. The seller credit allows them to do this.
Buyers, Speak to your local mortgage lenders to find out more about seller credit limits and how they can assist you. There are also mortgage programs that allow a lender credit.
The numbers speak for themselves. A very considerable amount of all home sales in Berks County has seller credit included. It is a condition that more home sellers have had to get used to over the years. Remember, it is sometimes better to give so you can receive!
Knowledge is Power!
Jeffrey C. Hogue