Hi Don,
There are a myriad of reasons for a seller credit to the buyer, but I'll tell you why most buyers prefer it over a price reduction of the same amount. Cash flow. If the purchase price is reduced by a few thousand dollars, that's great, but it doesn't greatly affect the amount of money the buyer needs to put down at closing if there is a new loan involved. For example, let's say the buyer is putting 10% down. A reduction in the purchase price by $3000 would translate to an upfront savings of $300 on the downpayment, while the remaining $2700 (90%) would be ammortized over 30 years, or whatever term is in place for the loan. Most buyers would prefer to shave that full $3000 off of the closing costs in the form of a credit rather than spread it out over the life of the loan. Hope that helps!

Fri Aug 3 2007, 17:11

Another possible reason for offering credits instead of lowering the price of the home is because by lowering the price, they may be lowering the price of the community as well. Valuations of nearby properties will be done via appraisals and appraisals use the comparable method most often. The comparable method is basically where they use the most recent recorded sales, the sales "comparables" to determine the value of the property. So if the seller lowers the price, then there is a high chance that the rest of the neighborhood's property values will fall as well, and then it may become a slippery slope.

But yes, credit backs can be used for many purposes including remodeling projects, repair projects, closing cost assistance, down payment assistance, etc.

Fri Aug 3 2007, 15:12

There are several ways for a seller to incentivize a buyer. 1) Lowering the price; 2) Offering a credit back....which, as pointed out below, can help the buyer with closing costs or repairs, 3) Buying down the interest rate to make the monthly payments more affordable for your buyer, or 4) carrying back a mortgage. It all depends on your buyer's needs.

Sun Jul 29 2007, 15:59

Don,
I couldn't add a thing.

Fellow REALTORs,
once again, I'm amazed at the quality of information that Trulia can provide quickly to the general public and other agents. Thank you. I am indeed proud to be in such fine company.

Sun Jul 29 2007, 12:41

Hello again,

I based my initial response thinking the contract had already been signed (I read the first question answered and thought it was from the same person who asked it…oops). And didn’t even think of these as reasons for credits, as typically the down payment and closing costs that have been referenced is worked out at the time the initial contract is signed. Thank you for adding on and thanks for letting me clarify!!

Melissa Mancini, Realtor, CBR, GRI

Sun Jul 29 2007, 12:36

Don - In addition to Melissa's comment, sometimes the Seller will offer a credit back to a Buyer as incentive to purchase their home over another. A Buyer may not have the initial down payment OR more often may not have the initial funds to pay for their portion of the closing costs associated with any real estate transaction. Another scenario, as brought out in Melissa's post, may be there is a cosmetic or repair blemish that the Seller does not have the time OR money to correct.

Psychologically speaking, most Buyers want a home that is move-in ready or if repairs/corrections are needed, can easily be resolved. A credit can provide an immediate solution / remedy for many buyers that a lowering of the sales price may not provide.

Sun Jul 29 2007, 12:17

Hi Don,

Sometimes buyers request a credit to be applied towards their non-recurrent closing costs up front, as part of contract negotiation. It is usually used to finance their closing fees including escrow, title and loan costs.

It's a great option for zero down buyers to help them get into a home.

Irina

Sun Jul 29 2007, 12:05

It really depends on what the credit is for. Often the buyers ask for help with closing costs. When this happens the seller is paying at closing out of his proceeds from the sales price a specified amount that would have been cash out of pocket for the buyers. Another reason that sellers will give money back to the buyer is for repairs or defects in the house found after the original contract was made.

Sun Jul 29 2007, 12:04

More often than not, the reason a credit would be given after a contract is signed, is due to defects in the home discovered during the inspection. There are typically 3 ways to negotiate this to keep the sale together if it occurs. #1 Reduce the price reflecting the cost of the needed repairs. #2 Seller agrees to repair prior to closing, #3 Sellers agrees to issue a credit to the buyers at closing equal to the amount of the repairs. #3 is usually the best way to handle this, as this will put the actual dollars in the hands of the buyer(s) for them to address after they take ownership. This is also beneficial to the seller as it reduces their liability to the defect. If an agreement states that the seller is to take care of issues prior to closing, and you hire Uncle Bob, or some contractor you found in the yellow pages to do the work, and it’s not done properly, than the buyer can further pursue the seller to rectify this even after the closing. #3 is the cleanest, and most beneficial to both parties involved.


Melissa Mancini, Realtor, CBR, GRI

Sun Jul 29 2007, 11:31

the contract is already signed

Sun Jul 29 2007, 11:15