Getting the absolute best price for a rental property is a key contributor to your cash flow along with market rents. The lower the sales price the lower the loan amount. Once a sales price is agreed upon you then inspect the property for any potential physical issues. Sellers are required to provide a repair allowances not allowedSeller’s Disclosure itemizing all the items that need addressing, at least to the seller’s knowledge.

Hiding a defect that shows up later can lead to a lawsuit requiring the seller to pay for damages as well as repairs and in some states the penalty requires the seller to pay treble, or triple the amount of repair costs.

Yet a property inspection goes deeper than what sellers might be able to discern on their own and after the report is completed a list of more than one hundred items will be provided and their current condition such as “working order, needs repair” and so on. Finding issues that need to be resolved can mean a renegotiation of the sales price to reflect the problems found. When the problems are minor the seller may simply decide to make the repairs in lieu of lowering the sales price. When the problem is not-so-minor, sellers may simply elect to provide a repair allowance to the buyers at the closing table. But this won’t work if you’re financing the purchase. Lenders won’t allow open-ended repair allowances. Why is that?

A credit to the buyers in the form of a repair allowance from the sellers is essentially a cash payment and is not allowed. The seller can pay for closing costs or lower the sales price but not provide a cash award to make repairs. The lender would never be able to determine if the repairs were made after the closing because then it’s too late, the sale has consummated. The seller can make the repairs before the closing but can’t provide an allowance. This happens on too many settlement statements when it doesn’t have to. That wording will stop a funding in its tracks.