Purchasing a residential rental property can be a wonderful opportunity to generate passive income as an investor. But between performing due diligence, purchasing the property, making any necessary improvements, and getting maintenance systems in place -- purchasing the rental property can quickly turn into large sums of money out of pocket before there is any return.
Seller concessions can be an option to consider to help reduce some of your out-of-pocket expenses. Learn what a seller concession is, the pros and cons of asking for a concession on a rental property, and how to determine whether asking for a seller concession on your next residential rental property purchase would make sense for you.
What is a seller concession?
A seller concession is when a seller gives or "concedes" to pay part of, or all of, the buyer's closing costs associated with the purchase. This helps reduce the amount of money the buyer has to bring to the closing table and can be used as a negotiation tool during the purchase of a rental property. Fees that may be covered by seller concessions include:
Pros of asking for a seller concession when buying residential rental property
Most investment property mortgages are conventional loans, which require a minimum of 20% of the purchase price as a down payment. This can amount to a large sum out of pocket before you see any return on your investment. Decreasing this amount you have to bring to the table as a buyer will ultimately increase your return and allow you to use your capital to improve the purchased property or potentially use your available cash to purchase other investments.
It is important to note that the maximum a seller is allowed to contribute on a conventional loan is 2% of the purchase price. Thus, for most residential rental property purchases, even the maximum seller concession amount would only be a small portion of your closing costs.
Cons of asking for a seller concession when buying residential rental property
One of the cons of asking for a seller concession is that the property will need to appraise for the higher purchase price. If the rental property is listed at or close to market value, even if the seller agrees to a concession, it may not get bank approval.
Additionally, asking for a seller concession can be seen as potentially off-putting by the seller, and you could risk getting your offer declined, especially in a competitive market.
Should you ask for a seller concession on your next residential rental property purchase?
If you are in a seller's market, you may risk losing the rental property to another buyer who has no concessions or more cash to put down. However, if it is a buyers market, asking for seller concessions can be a great way to reduce your out-of-pocket expenses or negotiate better terms to make it a more desirable investment.
Asking for seller concessions can increase your return on investment and allow you to utilize your available cash for other purposes, but there is always the risk of insulting the seller or losing the property to a more attractive offer.
Before asking for a seller concession, it is important to understand the pros and cons of such a request. Make sure to ask your Realtor, if working with one, for their expert opinion as to whether asking for a seller concession is the right move in your local market, as they are not always suited for every rental property offer.
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