Understanding Seller Assist

Seller assist is a very helpful financial mechanism to enable buyers to purchase a home with less upfront cash, but a difficult concept for many to understand. In fact, I am sure that there are many buyers who have utilized seller assist but never understood how it works. They just saw a cost sheet that showed them less cash required to make the purchase and decided, “Let’s do this one.”

What is seller assist?

One reason seller assist is confusing is that it is misnamed. It should be called “funds borrowed by buyer for closing costs” because that’s what it is. Here’s how it works. You and the seller agree that you will pay $100,000 for the seller’s property. You are short the cash necessary to complete the purchase by $3,000. So your agent writes up the sales agreement for $103,000 with $3,000 of seller assist. The seller, perhaps with the help of the seller’s agent, understands that the “effective price” is $100,000. At closing, the seller gets $100,000 for the property and the additional $3,000 of the contract price is applied to your closing costs. Your mortgage is based on the contract price of $103,000, so you are actually borrowing an additional $3,000. You will pay it back to your bank with interest just like the rest of your mortgage. Due to the accounting method in which it shows up on the final ledger as included in the sale price and then $3,000 is taken as a debit from the seller and given as a credit to the buyer, it is dubbed “seller assist”, making it sound like a gift from the seller which it is not.

What are the limits of seller assist?

Lenders impose limits on the amount of seller assist. At the time of this writing, conventional loans allow a maximum of 3% with a down payment of less than 10%. With 10% or more down conventional loans allow up to 6% seller assist. FHA loans allow 6% seller assist even with the current minimum 3.5% down. These limits are subject to change so you must always check with your lender to verify the current amount of seller assist allowed for your particular loan.

What is the cost of seller assist to the seller?

The seller does not pay anything for a buyer’s seller assist. The seller’s agent will show the seller a cost sheet that indicates the amount of seller assist as a deduction from the (adjusted) sale price resulting in the effective sale price the seller will receive. Nonetheless, some sellers do not like seller assist. It is not uncommon for a seller who receives an offer which includes seller assist to tell his agent, “I don’t understand this seller assist business but I know I don’t like it! No one helped me pay for my closing cost when I bought this house.” Can’t blame them too much, it is called “seller” assist after all.

Once the smoke clears and calm understanding prevails, there are true downsides to seller assist from the seller’s perspective. First of all, it implies that the buyer’s financial situation is marginal. Especially since seller assist is usually accompanied by the minimum down payment. In fact, if the buyer had more cash to apply to the deal, the risk of the buyer failing to secure final approval for financing would be lower. The seller in this case carries a higher risk of the deal falling through. The other very real risk for the seller is that the property may not appraise for the contract price. Remember, the price in the sales agreement includes the seller assist on top of the effective sale price and the mortgage amount is based on the contract price, not the effective price. So the bank will require that the property appraise for at least the contract price. If it does not, the buyer is protected by a mortgage contingency and thus can walk away and get her hand money back. The seller is left to put the house back on the market and start over again, now with the black eye on the listing that it was under agreement and returned to the market. Of course, the seller can sell the property to the buyer at the appraised value or negotiate with the buyer to split the difference between the appraised value and the contract price. The buyer would have to come up with additional cash for the amount over the appraised value that he has now agreed to pay, which he may not have since he asked for seller assist at the outset for lack of cash. In a very real sense, if the appraisal is considered spot on accurate on the value of the home, the seller is guaranteeing the buyer that she is getting the property for less than market value, by the amount of the seller assist. The seller does not pay for the seller assist, but that does not mean there is no cost to the seller.

Who should use seller assist?

The short answer is anyone who simply cannot avoid it. As mentioned above, sellers will frown on seller assist so a buyer loses some negotiation leverage by using it. An offer without seller assist is always stronger than one with. If a seller is fortunate enough to get two offers at the same time, both the same except one has seller assist and the other does not, the seller will always choose the offer without seller assist. However, often a buyer has good income and excellent credit but just does not have very much cash. This happens a lot with young professionals recently out of college. It is also very common in general in the United States where we have a very difficult time saving money. There are so many wonderful things out there to buy—and most of them are on sale this week! In general, it would be better to not have to use seller assist, but sometimes there are adequate reasons to buy now that makes it worth the downside. On the other hand, a buyer is well advised to be sure that seller assist is not just a means to jump in over one’s head. If income and credit are also marginal, this might not be the time to buy a house.

There is a special case where seller assist can be used to good benefit aside from when a buyer is just short on cash. In this case, seller assist is used to avoid paying monthly private mortgage insurance. PMI is generally charged when a buyer has less than 20% down. If a buyer’s down payment is within 6% of 20% down, bumping up the sale price and taking seller assist to get to a 20% down payment will eliminate the need for the monthly mortgage insurance. Here the buyer will not suffer from the seller’s perception of him as marginally qualified, but the seller’s concern about the property appraising for the contract price including the seller assist is still valid.

Seller assist is a sharp tool which should not be used unless necessary. It should not be employed to over leverage a purchase leaving the buyer at risk of default and foreclosure. Used appropriately, seller assist, although wrongly named, can be a very helpful instrument for both buyer and seller in putting together a mutually beneficial transaction.

Discovering Property Defects

Of great concern to many homebuyers is the risk that they buy a house that has a problem that is not discovered until after they own the home, and the problem.   The fact is houses can have issues, from improper installations to worn out components to shifting, settling and infiltration of water.

What is a homebuyer to do?

Virtually any defect in a home can be corrected, but at what cost.  And at whose expense?   The important thing is to uncover defects in a timely manner.  In general, the sooner a problem is discovered, the more options you will have in dealing with it.

To this end, a homebuyer has several lines of defense in discovering defects in a property.

Your Inspection

It is always advisable to make a second visit with your agent to a home that you are considering making an offer on—to confirm your feelings about the home and to scrutinize it for issues that may require repair.  If you see something that would deter you from buying the property, investigate it the best you can prior to making an offer.  Sometimes you can get permission to bring in an expert, e.g., a structural engineer, to help you evaluate the item of concern before writing the offer.  It is not a bad idea to bring a contractor or knowledgeable friend or relative to your second visit to the property to have another set of eyes working for you.  You can also have your agent include language in your offer requiring the seller to make repairs as a condition of your offer.  If you discover something at this point in the process and do not enter into an agreement because of it you may be disappointed but you will not have spent money on inspections, etc. and you have not lost time.

Seller Disclosure Statement

Any seller who lists a property in the multi-list in Pennsylvania must complete a six-page disclosure statement.  Your agent is required to provide you a copy of this disclosure for your review prior to making an offer.  Both you and your agent should review this document very carefully.  Any defects disclosed by the seller are generally considered off limits as far as requesting repairs or credits during the inspection process.  If a disclosed item is unacceptable to you, your agent should write into your offer language that requires the seller to address the issue as a condition of your offer.   If you find questions that should be answered which are left unanswered, have your agent get the answers from the seller in writing or make the written responses a condition of your offer.  Sometimes the seller just overlooked the question; sometime the seller knows of a defect and, not wanting to say it out and not wanting to lie either, effectively takes the 5th amendment and does not answer the question.

Professional Inspections

Your sales agreement should be written to include contingencies for inspections of the property, usually a home, pest and radon inspection.  If applicable, you should also have contingencies for well, septic system and lead-based paint.  Along with the inspection of the physical property, you should also have contingencies for “inspection” of the title, the property boundaries, deed restrictions, easements, insurability of the property, oil/gas/mineral rights.  It is highly recommended that you attend the inspections as you will learn a lot about the property, see first-hand any major issues discovered by the inspectors and have the opportunity to ask any questions you have of the inspectors.  You can also take a few measurements while you are there to make sure the furniture you are going to purchase will fit in the house.

The objective of the inspections of the physical property is to uncover “material defects”, i.e., defects that affect health or safety or have a significant adverse impact on the value of the property.  The language in the sales agreement itself, however, allows a buyer to request repairs or credits from the seller for anything in an inspection report that is “unacceptable” to the buyer.  There are no hard and fast rules about what the buyer can ask for nor for what the seller must address.   The buyer has the right to terminate the agreement for anything that is unacceptable; the seller has no obligation to agree to any repairs or credits that the buyer requests.  Therefore, the resolution of inspection issues is another negotiation between buyer and seller through their agents, often more onerous than the initial negotiation on the agreement of sale.  Therefore, it is wise for a buyer to consider the condition of the property when determining the price he/she is willing to pay for the property and to budget for some repairs.  Otherwise the buyer sets a low threshold for having to terminate an agreement if a seller does not agree to address inspection issues that are of concern to the buyer.  If the agreement is terminated at this point, the buyer loses the cost of the inspections (typically $450 or more), usually a non-refundable deposit to the mortgage lender ($350 to $500) plus time and emotional investment.   Faced with the cost of walking away, some buyers will compromise to an extent they would not have at the beginning of the process.

The buyer can request that defects discovered in the inspections be addressed by the seller by way of a repair prior to closing, paid for by the seller, or by a credit from the seller to the buyer at closing to cover the cost of the repair.  In general, if there is only one verifiable way to perform a repair, e.g., repair a malfunctioning bathroom exhaust fan, the buyer may want to ask for the repair to be done by the seller.  In cases where there is a range of ways a repair can be done, or a possible variation in the quality or a repair, or an aesthetic aspect that is of concern to the buyer, it might be better to get an estimate from a reputable contractor and request a credit from the seller and have the repair done after closing.  Generally, you should assume the seller will take the absolute cheapest way to make a repair.  They may hire Uncle Bob, who is out of work and has a drinking problem to do the repair to help him out and save them money.  Then you are stuck with a repair that is acceptable to the seller but not to you.

Post-closing Litigation

If you find a major defect after you close on the property, you can try to have it addressed by the seller by suing the seller and/or other parties involved in the transaction.  It is extremely hard to prove that a seller knew about a defect and did not report it on the seller disclosure and a law suit can be very expensive.  The best course of action is to be conscientious in the above steps so that this one does not even come up for consideration.

Again, the general rule is the sooner the better when it comes to discovering defects in a property you are considering buying.    You will have more options and less compromise if you find something bad sooner rather than later.