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Price Reduction vs. Closing Cost Credit: Which is Better?

By Bill Gassett | July 6, 2023

Negotiations are crucial in determining the deal's final terms when buying or selling a home. Two common strategies sellers use to entice potential buyers are offering a closing cost credit or a price reduction.

We will examine the pros and cons of both options and help you understand which might be the best choice for your situation.

What Is a Seller Credit?

A seller credit, or a closing cost credit, is an agreement where the seller agrees to pay a portion of the buyer's closing costs. Closing costs typically include fees associated with loan origination, appraisal, title insurance, and other miscellaneous expenses. The seller credits can help alleviate the buyer's financial burden during home-buying.

Seller credits at closing can sometimes be the difference whether a buyer can purchase a home. It is worth noting that a seller credit can be the same thing as a seller concession. Often these terms are used interchangeably.

Pros of Seller Credits

Financial Relief

Seller credits provide immediate financial relief for the buyer by reducing the cash needed to close the transaction. This can be particularly beneficial for first-time homebuyers or those with limited funds.

Improved Cash Flow

Buyers can allocate their available cash towards other essential expenses such as moving costs, furnishing the new home, or emergency funds by receiving a closing cost credit.

Financing Eligibility

Some mortgage programs have specific requirements regarding the buyer's contribution to closing costs. Buyers may meet these requirements more easily by receiving seller credit and securing their desired loan.

For example, a seller can contribute 6 percent towards the buyer's closing costs with an FHA loan.

Negotiation Leverage

A seller concession can be a valuable bargaining tool for buyers during price negotiations. They can ask for credit in exchange for accepting a higher purchase price, allowing both parties to reach a mutually beneficial agreement.

Cons of Seller Credits

There also can be disadvantages to giving sellers concessions. Let's take a look.

Higher Listing Price

Sellers who offer closing cost credits often factor these expenses into the listing price, which may result in a higher initial asking price for the property.

Reduced Net Proceeds

When sellers offer closing cost credits, they effectively reduce their net proceeds from the sale. This reduction in proceeds should be carefully considered, especially if the seller needs the full amount to cover other expenses or purchase a new property.

Appraisal Challenges

If the seller agrees to cover a significant portion of the buyer's closing costs, it may affect the home's appraisal value. Appraisers consider seller credits, and an inflated purchase price may lead to appraisal issues. It's possible to end up with an appraisal gap that needs to be satisfied.

Understanding Price Reductions

A price reduction is a straightforward strategy where the seller lowers the property's asking price. This reduction is typically a fixed dollar amount or a percentage of the original listing price.

Advantages of Price Reductions

Attracting More Potential Buyers

A lower asking price can attract a larger pool of potential buyers who the original price may have previously deterred. It can create a sense of urgency and encourage buyers to act quickly. Accurate house pricing is always essential to success. When you're property is priced lower than market value, it almost always draws in far more buyers.

Competitive Edge

In a competitive market, a well-executed price reduction can position your property as a better value than similar listings, increasing its chances of selling faster.

Appraisal Stability

With a price reduction, the listed price aligns with the market value, minimizing the risk of appraisal issues and potential complications during the closing process.

Disadvantages of Price Reductions

Lower Net Proceeds

By reducing the asking price, sellers may receive less money from the sale, affecting their financial plans or ability to purchase another property.

Perceived Property Value

A price reduction can create the perception that something might be wrong with the property, leading potential buyers to question its value or condition.

Limited Negotiations

Once the asking price is reduced, there is less room for negotiation, potentially limiting the seller's ability to further influence the final sale terms.

Closing Cost Credit vs. Price Reduction: Which is Right for You?

Deciding between a closing cost credit and a price reduction is a critical consideration for sellers in the real estate market. Both options have advantages and disadvantages, and understanding the factors that influence your decision can help you make an informed choice.

Let's explore the key points when comparing closing cost credits and price reductions.

Buyer Incentives

Closing Cost Credit: Offering a closing cost credit can attract buyers. It helps ease their financial burden during the closing, making homeownership more accessible. Buyers concerned about upfront costs or have limited funds for closing expenses may be particularly drawn to this option.

Price Reduction: Conversely, a price reduction appeals to buyers seeking a better deal or those who are price-sensitive. It creates value and urgency, potentially attracting more potential buyers to your listing.

Financial Impact

Closing Cost Credit: One significant consideration with closing cost credits is the effect on your net proceeds. By agreeing to cover a portion of the buyer's closing costs, you effectively reduce the money you receive from the sale. This reduction should be carefully evaluated, especially if you have other financial obligations or plans for the proceeds.

Price Reduction: Reducing the price makes the impact on your net proceeds more straightforward. The lowered asking price means you will receive less money from the sale. Consider your financial goals and any necessary calculations before opting for a price reduction.

Market Conditions

Closing Cost Credit: In a buyer's market or when there is increased competition among sellers, offering a closing cost credit can give your listing a competitive advantage. It can differentiate your property from others and attract potential buyers looking for assistance with closing costs.

We often see this when real estate transitions from a seller's to a buyer's market.

Price Reduction: A price reduction can be effective in any market condition. However, it is particularly advantageous in a seller's market or when your listing has been on the market for an extended period. Reducing the price can generate renewed interest and motivate buyers to act swiftly.

Appraisal Considerations

Closing Cost Credit: It's important to note that appraisers consider seller credits when determining a property's value. If the seller credit significantly inflates the purchase price, it may raise appraisal challenges. This could lead to appraisal issues or potential complications during the closing process.

Price Reduction: When executed strategically, price reductions can align the listed price with the property's market value. This reduces the risk of appraisal-related complications and provides a more stable foundation for the transaction.

Final Thoughts

Deciding between a closing cost credit or a price reduction requires careful consideration of various factors. Seller credits can attract buyers, increase affordability, and provide negotiation flexibility, but they may result in a higher listing price and reduced net proceeds.

On the other hand, price reductions can attract more potential buyers, create a competitive edge, and provide appraisal stability. Still, they may result in lower net proceeds and limit negotiation opportunities.

Ultimately, the best approach depends on your specific circumstances and goals as a seller. It's advisable to consult with a real estate professional to determine the most suitable strategy for your situation.

Bill Gassett is an authority in the real estate industry with 38 years of experience. Bill is well respected for his informative articles for buyers, sellers, and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Newsbreak, Credit Sesame, Realty Biz News, and his own authoritative resource, Maximum Real Estate Exposure. He has been on of the top RE/MAX agents in New England over the last two decades.
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