Explain "Repair Allowance" in regards to closing and buying

[Christian Beebe]

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.  

[Scott S.]

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.