Rental Property Investor · Phoenix, AZ · Member since 2016 · 94 posts · 13 votes
Always working to learn here and currently learning about all the ways to finance a down payment and one of the lists we had read mentioned using a repair allowance. You inspect the property and determine what need to be done in repairs. You add up the cost and have that money given back to you at the closing.
So without sounding dense, how exactly does this work? Is this with a normal loan, meaning let's say the property is worth $1,000,000 and you can buy it for $650,000. So you would put in the $100k with the loan at the same time for a "repair allowance" which would go into the loan but would be given to you at closing which you could use for the down payment on the same property?
We have a couple properties with this type of criteria so trying to figure out exactly how to use this and make this work.
Investor · Minnetonka, MN · Member since 2016 · 123 posts · 86 votes
9y
I don't think I'd use the repair allowance for the down payment unless the repair can legitimately be put off...?
If you discover the $1M property needs $100k in repairs, you have a few choices: 1) have them lower the price by $100k, 2) tell the seller to fix it before you buy, or 3) keep the price at $1M but have them give you $100k at the close.
#1 means your loan wouldn't cover the repair costs and you'd have to come up with that out of your operating funds or you pass the hat one more time to your investors.
#2 is great if the seller wants to and can do the work (they may have contractor relationships they can leverage) and there is time before they need to close on the property.
With #3 the repair costs are rolled into the loan but you'll get the cash back to do the repairs at your leisure.
Investor · Minnetonka, MN · Member since 2016 · 123 posts · 86 votes
9y
I don't think I'd use the repair allowance for the down payment unless the repair can legitimately be put off...?
If you discover the $1M property needs $100k in repairs, you have a few choices: 1) have them lower the price by $100k, 2) tell the seller to fix it before you buy, or 3) keep the price at $1M but have them give you $100k at the close.
#1 means your loan wouldn't cover the repair costs and you'd have to come up with that out of your operating funds or you pass the hat one more time to your investors.
#2 is great if the seller wants to and can do the work (they may have contractor relationships they can leverage) and there is time before they need to close on the property.
With #3 the repair costs are rolled into the loan but you'll get the cash back to do the repairs at your leisure.
Lender · Sterling, CO · Member since 2017 · 4 posts · 2 votes
9y
@Scott S. or @Brian Adams - let's say the repairs could be put off. What would the process look like if someone wanted to use the repair clause simply to fund a down payment?
For example - I'm looking at a 4-plex listed at 135k. Currently, it is fully occupied, so there are no repairs needed immediately, although there are several things I would like to do over the course of the next year or two. I only have roughly 5k for the down payment - assuming I'll put 25 % down, I'd need another 28k for the down payment. Assuming the seller is on board, could I negotiate a 30k repair clause and use it as the down payment? I've read several places it's possible, but how would it work considering I'd need the cash to close, but the repair clause wouldn't actually be paid to me until after we close?
Investor · Philadelphia, PA · Member since 2016 · 2k+ posts · 1k+ votes
9y
Many mortgage companies consider a repair allowance (sometimes referred to as seller assist) as a decrease in the value/price of the house. Therefore it adjusts the LTV percentage, meaning you might not be able to obtain as large a mortgage.
If the repair allowance is a small amount (couple thousand $$), I've seen it handled as a personal check outside the official closing/HUD-1 process. But when you're taking real money, that would be risky and harder to do legally and ethically.
Syndicator of Large Apartment Buildings · Glen Mills, PA · Member since 2009 · 1k+ posts · 1k+ votes
9y
@Shane Engelken recently I bought a 550+ unit deal and the seller gave a repair allowance which was reflected on the closing sheet.
The repair allowance reduced the amount of funds I needed to close the deal and didn't adjust my LTV.
In your example, it would be something you would need to work out with the seller outside closing. Make sure you work with a good real estate attorney.
Investor · Huntington Station, NY · Member since 2016 · 1 post · 0 votes
7y
Hi - for the person that got that "repair allowance which was reflected on the closing sheet" - - I wonder what tax implications are for the seller. In my case - I will be the seller very soon and I have a feeling that the question will come up about this. My property is no where as big as what you are used to dealing with but I guess the same IRS rules apply :) Thanks! Tanya
Specialist · Tampa, FL · Member since 2012 · 933 posts · 492 votes
7y
@Christian Beebe I've never heard of anyone being able to use a repair allowance as a down payment. Don't see how that can possibly be done. Usually a repair allowance comes into effect when you have an inspection on the property and there are major damages the report unveiled, you can negotiate with the seller to give you a repair allowance. Let's say the property you are buying has a 600K purchase price and the report revealed damages of 100K. You can ask the seller to increase the purchase price to 700K and the 100K is kicked back to you as a repair allowance allowing you to do those repairs. Hope this helps.
Lender · Lewis, CO · Member since 2017 · 218 posts · 159 votes
6y
A down payment is only able to be financed with a down payment assistance program.
In all other cases, down payments by definition are not financed and you can't use a repair allowance for one, that doesn't make any sense. No this is not anything possible with a "normal" mortgage. Maybe you can be more specific where you got these ideas from.
Is what you're saying, you think you can put down $100,000 and get more than $100,000 at closing from the lender in cash?
Nobody is giving you cash at closing, on a purchase, to do with what you will. The lender is going to hold on to the money and use an administrator to give you draws as work is completed by a qualified contractor and verified by an inspector. They are not paying you, they make payments to the contractor/s. A lender isn't going to give you more money than a property is worth and just trust that you're going to get it done. In Brian's example the repair credit was almost certainly held back in escrow and paid out as repairs were completed. It was on Brian's settlement statement because it was being held back in escrow. Trying to do this outside of closing isn't going to be cool with your lender.
I think you're going to have to go into more detail if you want more of an answer.
Hi - for the person that got that "repair allowance which was reflected on the closing sheet" - - I wonder what tax implications are for the seller. In my case - I will be the seller very soon and I have a feeling that the question will come up about this. My property is no where as big as what you are used to dealing with but I guess the same IRS rules apply :) Thanks! Tanya
I'm not sure how many accountants or tax professionals are on this forum and you shouldn't be taking tax advice from other people, nor should they be giving it if they aren't an accountant.