For a seller, when is a home price reduction a good choice? Say you’re selling your home and have a decent offer in hand. But to get the agreement, the buyers want to negotiate a credit from you at closing. Should you agree to that, or would a home price reduction be the smarter option? Here’s how to think it through.
Is one as good as the other?
To illustrate how each concession works, say you get an offer on your house for $300,000. The buyers request a $7,000 credit toward their closing costs. You and your agent consider offering a $7,000 price reduction instead. In most cases, the numbers support a price reduction rather than a credit. Here’s why:
- A buyer hungry for credit at closing could be short on cash for the purchase. This becomes more apparent when you offer a price reduction, and they still insist on a credit.
- Since many closing fees are calculated as a percentage of the sales price, they will decrease with a sales price reduction, but will remain higher when you issue a closing credit instead.
- A lower sales price could reduce capital gains tax liability later. People below certain income thresholds pay no capital gains tax on the sale of their homestead if the capital gain is below $250,000 for individuals and $500,000 for married couples. A lower sales price might make the difference between paying the tax and not paying it.
- Lowering the price could help avoid a mortgage lender’s loan-to-value limit. Your buyer’s mortgage company will only lend against what their appraisal of the home’s worth is. If the sales price exceeds that limit, the buyer and seller must reach a compromise by either the buyer putting more cash down on the house, the seller reducing the price, or both. A sales price reduction addresses this issue.
Being smart about a home price reduction
While a home price reduction generally prevails over a closing credit, price reductions should be used strategically.
First, don’t reflexively drop the price if no offers come right away. Instead, your agent should collect buyer feedback from showings and open houses. Rather than just dropping the price, see whether there is negative feedback about the home that can be addressed through moderately priced improvements.
If you decide to reduce the price, first research comparable home prices in your area and make a reduction that aligns with market conditions and timing.
If a buyer sends you a low-ball offer, keep a cool head. Do not reject the offer brusquely as an insult. Let the buyer know you’ll accept a more reasonable offer, and send a counteroffer much closer to your price than theirs. This communicates that their offer isn’t reasonable while leaving the door open to a mutually agreeable compromise.
Finally, be mindful of the image you may be presenting with a price drop. Too much or too quick can signal to potential buyers that something is wrong with the house. Or it may imply that you are desperate to sell, which can lead buyers to pass over your listing without proper consideration.
Related – Timing the Market: When Stars Align for Selling
