21
Sep
09

repair allowances…not allowed.

I don’t see these as much as I used to but I still see ’em.  Repair allowances offered by the seller to the buyer often in lieu of making the repairs or upgrades themselves.  If the carpet is a hideous orange shag and the buyer is balking sometimes a seller might say “Hey, I’ll give you a $5,000 carpet allowance if you buy this house” or something like that.  The buyer agrees so the listing agent writes up a counter that includes the $5,000 carpet allowance.

The escrow period then goes along its merry way until the lender sees “carpet allowance” in the contract and puts on the brakes.  “Sorry: but there are no allowances allowed.”

Why is that?

If there is something in the contract that needs to be performed by either party the lender is obliged to make sure everyone does what they say they’re going to do if it involves the loan either by way of appraised value or ultimate loan amount.  But how can a lender verify that the ugly orange carpet will indeed be replaced after the deal closes?  Does the lender, two weeks after escrow closes, knock on the door and say, “Hey, can I take some pictures of your new carpet?”  Of course not.  If cash is given to the buyer at closing it must be for closing costs or some other tangible item but it can’t go towards paying for future upgrades, repairs or remodels.

What CAN be in the contract is a seller contribution towards closing costs however.  It’s perfectly okay to say “Seller will pay $5,000 in buyers closing costs” and if the seller contribution is sufficient to match any repairs or allowances then mission accomplished.

Just remember, repair allowances are not allowed.

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