Giving Credit where Credit is Due

Often real estate contracts include additional terms or addenda that provide for a “seller credit”. These typically take the form of a credit from the seller to the buyer, with the purpose for and amount of the credit negotiated between the parties. Sometimes credits are negotiated as part of the initial sales contract, and sometimes a credit will come later to keep the transaction on track. Some credits take the form of a fixed dollar amount that will appear as a lump sum on the closing statement, and others may provide a fixed sum or percentage of the purchase price to be applied to something specific. Regardless of the situation, before drafting the language for the credit it is important to ensure that both parties are in agreement on exactly what the credit will cover, and any discrepancies should be clarified prior to the document being signed. Further, it is imperative that a seller be aware that by agreeing to provide a credit to the buyer, the seller is agreeing to provide the credit in addition to any fees or expenses related to the closing that the seller is already obligated to pay under terms of the contract.

For example, “seller to contribute $10,000.00 to buyer’s closing costs and prepaids” may be interpreted by a buyer to mean that the Seller will make a contribution of $10,000 toward the total for closing costs that the buyer would be paying, including any of their loan related costs, the prepaids required to be collected at closing (if the buyer has a lender), including prepaid insurance, taxes, and even interest. However, the seller may have intended to only make a contribution toward certain closing costs, or expected this to mean that since the buyer is picking and paying for the closing agent that all of the closing costs are the buyer’s responsibility and the seller is not responsible for more than $10,000.00. This often causes an issue when the parties review the settlement statement and the seller sees that their proceeds from the sale are not what they expected, or that they are spending more than $10,000.00 in closing related expenses.

Similarly, “seller to contribute up to $10,000…” can mean that a buyer could get up to $10,000.00 but the amount could be less; and conversely, the seller would need to understand that they will likely be responsible for paying $10,000.00, but in some circumstances they could end up paying less. The final amount of the credit in this situation would depend on the specific verbiage and specifics of the transaction. Additionally, if a lender is involved, there may be lender underwriting guidelines that impact the amount of the credit the seller can give (and the buyer receive) and to what items the credit can be applied.

Whether you are a buyer or seller always contact your local real estate attorney in advance of signing a contract or addendum with seller credit language to ensure you understand the verbiage being used and how it will impact your closing.

Berlin Patten Ebling, PLLC

Article Authored by Natasha Selvaraj, Esq.

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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