Upon making an offer on an investment property, the first order of business is to order an inspection. All successful real estate investors know that. In fact, some investors order two independent inspections to make sure nothing is left to chance. repair allowances for investment propertyThis is commonplace when the property has been neglected for quite some time or there appears to be possible structural issues that only an inspector or engineer can identify.

The inspection answers two primary concerns, the first addresses the repairs and remodeling costs necessary to get the property into shape for a flip or to rent. The second aspect is to make a new offer to the seller, adjusted for any physical issues with the property. For example, you make an offer on a property for $200,000 subject to an inspection. After a few days, the inspection report is returned and points out a few basic repairs that are needed but nothing critical.

The report indicates the back deck needs a complete repair including new railing. You determine it will cost $5,000 to replace the deck so you prepare a new offer. At this stage you have three choices; you can ask the seller to repair the deck, reduce the sales price by $5,000 or simply walk away from the deal.

The seller then has two choices to make; repair the deck before the closing takes place or accept the reduced offer of $195,000. But the seller believes there is one other choice: a repair allowance. But the seller is wrong. A repair allowance is an amount credited to the buyer at the closing table to be used for any repairs the buyer believes is necessary.

The problem with repair allowances is they’re open-ended. If the buyer is financing the purchase, the lender will not approve an allowance; there’s no way to verify the deck has been repaired once the closing has taken place. In this instance, it’s simply a cash incentive to the buyer which is not allowed by banks. Reduce the sales price, repair the deck or even pay $5,000 in buyer’s closing costs but don’t work with a repair allowance. It will stop the deal dead in its tracks.