The Seller Agreed to a $30,000 Repair Concession. Now What?
After inspections, a seller agrees to give the buyer $30,000 toward repairs rather than doing the work. The negotiation is over. How the $30,000 gets delivered to the buyer is not.
People commonly refer to this as a "seller credit," but there are important distinctions in how the funds actually benefit the buyer. This is why when we negotiate a post-inspection "concession" for a buyer, we reserve the buyer's right to determine how those funds flow. That can mean a credit toward certain closing costs, a reduction in the purchase price, or a combination of the two. An escrow holdback is a third option that works differently.
Closing Cost Credit
A seller closing cost credit is the most useful option when the buyer wants to preserve cash. Despite the term "repair credit," the buyer does not receive that money after closing to spend on repairs. Instead, the credit reduces eligible closing costs the buyer would otherwise pay, such as escrow and title fees, loan fees, prepaid property taxes and the first year of homeowners insurance. It cannot be applied to the down payment.
The result is that cash the buyer would have spent on closing costs is preserved. However, credit toward closing costs may or may not absorb the full seller concession. For example, if the seller agrees to $30,000 but the buyer has only $14,000 of eligible costs, the rest cannot simply be credited. Because we reserve the allocation, the buyer can take $14,000 as a credit and apply the remaining $16,000 to the purchase price. This is also why the buyer's lender should weigh in before the allocation is set, as different lenders have varying policies regarding which closing costs the concession may be used for.
A Price Reduction
A price reduction is simpler. The purchase price comes down. A credit can reduce cash at closing by as much as the full $30,000. A $30,000 price reduction, with 20% down, means the buyer's down payment is reduced by $6,000 and the loan amount by $24,000. The benefit continues after closing. At an approximate 1.25% property tax rate, a $30,000 lower price saves roughly $375 in the first year; the lower tax basis carries forward.
Escrow Holdbacks
An escrow holdback is different. A contractor bid is submitted with scope of work and other details requiring lender approval before the holdback account is set up, well before closing. Funds from the seller's proceeds stay in escrow after closing until agreed-upon work is completed. Then funds get released by escrow to the contractor once the repair is verified. This can make sense when a repair cannot reasonably be finished before closing, though questions of completion, scope of work and quality can be challenging. Further, if the condition affects the property's safety, soundness or structural integrity, the lender may decline the holdback and even require the work be completed before the loan will fund. That is the risk in asking, and it is one reason holdbacks are rarely used. We have seen far more proposed than completed.
In an all cash purchase, the same approvals and challenges apply between buyer and seller, but without lender involvement the process is more straightforward.
The Options, A Recap
- A creditreduces what the buyer brings to closing, up to the amount of eligible closing costs.
- A price reduction lowers the down payment, the amount financed and the property tax basis going forward.
- A holdbackkeeps money in escrow until specific work gets done.
Which one fits depends on the buyer's goals, the closing costs and what the lender will allow. Those are rarely clear at the moment the concession is agreed, which is why we negotiate the concession first and then discuss the merits of the above strategies soon thereafter.
Your Trusted Advisors,
Peter and Tregg
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