In a real estate market that is presently working to sellers' advantage, the idea of negotiation may appear to be irrelevant. On a national scale, housing inventories are low while the pool of buyers is comparatively large. These twin facts imply that a seller can almost certainly get his or her way in any transaction. Yet this is not necessarily the case. Every property is different just as each seller approaches a potential conveyance with a unique level of urgency. In fact, each owner who faces pressure to drop the sales price must consider making allowances as a viable alternative.
What Are Allowances?
Allowances are credits the seller advances to the purchaser that are applied against the sales price. When a house is in need of repair -- and the seller lacks the time or funds (or the desire) to make the necessary improvements -- one way to resolve the matter is for the seller to finance the work through his or her own sale proceeds. Accordingly, when settlement day arrives, a credit shows on the settlement statement subtracting the calculated sum from the amount due to the seller. This reduces what the buyer must pony up without changing the sales price.
Common Reasons for Allowances
A new roof or re-shoring eroded masonry -- particularly outside stairs -- are unquestionably acceptable reasons for making an allowance. Painting, window replacement and certain landscape restoration are also common restoration projects that qualify for seller credits. There are other uses that invite controversy. A "flooring allowance" is often realtor-speak for new carpeting. "Decoration allowances" can also raise eyebrows so sellers should consult with their agents and attorneys before stretching the allowance limits in terms of acceptable purposes. In the end, these allowances can make the difference between a deal that closes and one that falls through.
How Large Can Allowances Be?
Not every lender will permit seller credits when underwriting a loan application but most make some room for them. With conventional mortgage loans, the seller contribution can be up to six percent of the sales price if the downpayment is 10 percent or above. Under 10, seller credit is restricted to three percent. There are cases when allowances can go higher but the down payment must be fairly substantial. With government-backed loans like those from the Federal Housing Administration (FHA), a six percent credit is maximum in all cases. In no instance can seller credits exceed the total closing costs from the buyer.
Is an Allowance the Same as a Seller Concession?
Allowance, credit and concession are often used interchangeably yet the connotations differ. An allowance usually refers to a repair , replacement or refurbishing -- often related to issues that arise from the home inspection. A concession is more often used to reduce the closing costs due from the purchaser. Ultimately both work to the same effect. In the end, the buyer must be able to afford both the property and the closing.
Price Drop or Allowances?
Allowances, credits, whatever you call them do not lessen the amount borrowers owes to lenders. The home values remain the same, too. They merely make it easier for the buyers to close on a new house. However, lowering the sales price might affect any financing that the buyer secures because the ratio between the credit amount and home values will change. If a seller can comfortably absorb the cost of a few thousand dollars, it may be well worth the sacrifice for a timely and clean settlement. Your realtor can provide wisdom here.
