The “Seller’s Concession” in New York State
What? Who? When?
The American dream of owning a home… has become a materialized reality!! As the prospective purchaser… correspondence with your real estate agent has proved successful… your purchase offer has been accepted by the seller.
The contract of sale has been prepared and (presumably) finalized. All of the requisite “embryonic” steps have occurred. The terms as you understand them to be,… by and between you,… as buyer… and the seller,… have been finalized… or so you believe.
Believing that the terms, to wit, sales price, and loan amount to be procured, etc. have been addressed, you begin your endeavor to successfully obtain financing from a Lender/Loan Representative for the most competitive rate of interest, monthly payment, loan program, etc.
At this stage, your loan officer, and subsequently attorney, attempt to familiarize you… and allow for… a conceptual understanding… of a “Seller’s Concession” (a.k.a. “Seller’s Contribution”).
In curt summation, this is a method in which the closing costs of the purchaser are “rolled in” to the loan amount; diminishing/reducing the out of pocket “cash to close” needed by the purchaser for closing, as well as reducing the deposit/down payment to be deposited with the Escrowee agent, by Purchaser, pending closing.
The Sales Price is “augmented/increased” by the “good faith” estimated closing costs… and the loan amount allotted for “to be obtained” via the contract of sale… by the purchaser… is also increased in direct correlation with the increased Sales Price.
The Sales Price is not increased… per se… whereby additional consideration need be remitted by the purchaser to the seller. Rather this increased amount “triggered” by the closing cost concession… “added” to the purchase price… is credited back to the purchaser, by the seller, at closing.
The dynamics of such a “deal structure” allows the purchaser to borrow more money, by “increasing” the contractually stipulated value of the Premises… to be pledged as collateral for the monies to be lent. This in turn increases the Loan to Value Ratio (between the value of the home and loan amount)… in a way that would justify such an increase in the loan amount.
Although seemingly beneficial, there are certain caveats.
The purchaser would, typically, be responsible for paying the NYS (and /or NYC) Transfer Taxes on this increased amount. The home/residence must appraise (by the lender) for this increased amount; the monthly payments on the loan would be somewhat higher… given the fact that more money is being borrowed (albeit, from an amortization standpoint, this may be economically sound to recapture what would have been a significant lump sum cash remittance at closing); there must be specific legal language incorporated in to the contract of sale dictating that all parties are aware of this increase in price (said verbiage to be incorporated so as to assure that NYS Legal Ethical Parameters (NYS State Bar Opinion 817–11/2/07) is strictly adhered to. and that all parties are aware of this “gross up”); the Lender must approve the monetary value of the concession.
In summation, as a prospective purchaser, when approached with the term “Seller’s Concession”, be sure to inquire from your attorney and Lender/Lender Representative (as well as accountant), as to what the underlying logistics involving such a concession would mean; any/all consequences of same, as well as all contingencies in conjunction with said concession.
This article is generic in nature, and meant to provide a superficial overview as to the mechanisms of the “Seller’s Concession”. Deference to legal counsel and a qualified loan professional of choice must be obtained for more definitive guidance.