You may have heard the term “seller’s assist” in the real estate world. It can be a powerful tool for buyers and sellers. Here are some facts about what it means and how it’s applied to parties on both sides of the deal.
What is a seller's Assist?
A seller's assist is a financial concession, in the form of a credit, provided by the seller to the buyer in a home sale transaction. In simpler terms, the seller gives part of the property’s sale price back to the buyer at closing. The buyer can use it to cover closing costs which can include: an interest rate buy down called “points”, transfer tax, title insurance, hazard insurance, property taxes, notary stamp, recording fees, and appraisal, to name a few.
How does it work?
Buyers request the seller's assist in their initial offer or after the home inspection. It is completely up to the seller if they are willing to assist the buyer with costs, they do not have to accept these terms. They can refuse or counter with different terms or amounts.
There are a few reasons both parties may agree on a seller’s assist. A common one is after a home inspection. Let’s imagine the home inspection uncovered an issue that affects the value of the home or needs to be repaired by the buyer immediately after settlement at which point they don’t have any cash left in their pocket. Instead of the seller doing the repairs for the buyers by hand or with their own contractors, they will offer the buyer a credit in the form of a seller’s assist. The buyer will then apply the credit to their closing costs which allows them to keep that amount of cash on hand to manage the repairs once they own the property. It also allows the buyer to have control over who does the work, how, and when.
Before you break out the calculator and add up the cost for each and everything on your inspection report, there are rules on how much can be requested via a seller’s assist. For example, on an FHA loan, the maximum seller’s assist is 6% of the property price. On a conventional loan with less than 20% down, the max assist is typically 3%. For buyers putting 20% or more down on a conventional loan the max seller’s assist is 6%. Read more about the types of loans that allow for 6% seller’s assist with 3% or less down here.
Why would I ask for a seller’s assist as a buyer?
A seller's assist can make all the difference for the buyer's ability to purchase a home. A down payment isn’t the only sum to save for when buying a home. Buyer’s also have closing costs to pay for. In the Philadelphia area, closing costs run about 4%-5% of the home price. They cover items such as transfer tax, lender’s fees, at least two kinds of insurance, and real estate taxes. If a seller offers an assist, the buyer can apply the credit to their closing costs, allowing them to need less cash to complete their purchase.
Why would a Seller offer an assist?
The amount of the assist comes out of the sale price and essentially reduces the seller’s net profit. Sometimes there’s no difference between the selling price and what the seller owes against the property so the seller can’t offer the buyer monetary assistance. In this case, there’s no room in the transaction to offer an assist.
However, when possible a seller may offer financial credit to enhance the desirability of a property that needs to overcome a quirk or is priced a little high. If repairs need to be made to the home and an interested buyer doesn’t have enough cash to cover the costs after they pay their down payment and closing costs, a seller can offer an assist as a solution. Or after an inspection, by providing a credit to the buyer, the seller can avoid the possibility that the buyer would have a problem with how the repairs were done, and avoid relying on contractors to complete repairs on time and on budget.
How does it work at the closing table?
To help explain how seller’s assists are applied let’s look at these two examples.
Say the listing price is $420k. The sellers couldn’t replace the carpet or paint before they move out so they’re offering buyers a $10,000 seller’s assist to do those needed updates post closing. This means the seller is going to net $410,00 of the $420,000 price. The buyers get to keep $10,000 of the cash they were initially planning to use to purchase the home, pick their paint colors, and use the credit toward hardwood floors instead of new carpet. Both parties are happy and the deal moves forward!
But what about a seller that has a hard bottom line and their buyer only has a down payment and needs the seller’s assist in order to pay closing costs? Or what if a competitive market? What if multiple buyers are making offers on the same property and don’t require a seller's assist? In these scenarios, buyers who need a seller’s assist make offers ABOVE the asking price. For example, the seller is asking $420,000. The buyer offers $430,000 and asks for a $10,000 seller’s assist. This allows the seller to give the buyer $10,000 of the $430,000 at closing, AND still receive the full asking price of $420,000.
The downside of this for both parties is that their transfer tax and commissions are based on $430,000, not $420,000. For the buyer, their loan amount and insurance are based on the higher amount as well. These increases are typically small. For example, if the buyer's closing costs are 4% on an additional $10,000 that adds $400 to the total closing costs, which is paid for by the assist. If a seller’s closing costs are 8% then they pay an extra $800 from the purchase price to work with this buyer. If the buyer is putting 3.5% down on a house that’s now $430,000 not $420,000 they need to add an extra $350 to their down payment. If they simply borrow $10,000 more than planned, their mortgage is $60 bucks more per month. Either way their total cash out of pocket will be $10k less at closing due to the seller’s assist credit.
How an Appraisal affects a seller’s assist.
It’s important to note whether you go with option A or B above, the home will have to appraise at the purchase price in order to preserve the loan to value (LTV) specified on the agreement of sale (AKA purchase contract). In this example, if the home appraises at the purchase price or above you are golden and the deal can move forward without issue! If it appraises less than the purchase price, you have a number of options. As an example let’s use a purchase price of $430k with an agreed upon $10,000 assist, but the house appraises for $425k. If the terms of the AOS (or purchase contract) stay the same, the seller is now netting $415,000 instead of the originally agreed upon $420,000. Or…
The buyer could add the $5,000 difference to their cash needed to close or reduce the seller's assist from $10,000 to $5,000. In some cases, the buyer can increase their loan amount $5,000 to avoid needing that much more cash but there are various implications to this approach that are determined by the lender. When the buyer agrees to change their terms so the seller’s net does not change, this is called “bridging the difference” and the seller would net their originally agreed upon $420,000.
The seller could bridge the difference by bringing the price down to $425,000. The seller's assist would remain $10,000 and the seller nets $415,000 instead of their originally agreed upon $420,000.
Both buyer and seller can split the difference. Let’s use 50/50 for example. This can be done by reducing the seller assist $2500 to $7,500 so the seller nets $417,500 instead of $415,000 and the buyer’s cash needed increases by $2,500 instead of by $5,000.
Buyer can provide a letter of declination from their lender because they don’t have an additional $5,000 and the seller cancels the deal.
A seller's assist can be an advantage for both parties. Lean on your agent to help you understand what makes the most sense if you are making or accepting offers that involve seller’s assist. They can help you understand the numbers and what makes the most sense for your particular situation.
