We rehab in San Antonio and when we have our houses under contract to sell there is ALWAYS an offer with an allowance - ex 100k with 4k allowance bringing the net down to 96k. That being said, these are usually homes for sale for less than 200k. When I was in Austin I almost never saw these allowances. Thoughts? Is it common to have all these buyers with no cash on hand to close? Is it just an annoyance we have to deal with?
Yep, common with FHA buyers everywhere and for other financed buyers, why not ask?
When you run comps in the neighborhood, terms and seller concessions should be taken into consideration. Most areas show some consistency with what you can expect to pay and types of financing types typically used. Hopefully this can help you run your numbers going in.
Seller concessions are normal in most neighborhoods in San Antonio. Most buyers in this market have very minimal cash to come out of pocket. Keep that in mind when taking an FHA offer over a conventional, know that if there are any appraisal issues, the buyer will have nothing to cover the difference.
I do that all the time on my commercial properties.
Just paid $850k for a small strip center. Had the prices raised to $950k with a 100k repair allowance.
Appraisal supported the $950k price. Bank did a loan for $760k. So my cash to close was only $90k (even fees were offset by prorated rent credits, prop tax prorate and SD credits)
This makes my return on cash insane.
I beat this drum constantly. No way I could buy as much without a smidge of creativity.
Does that example @Cody L. mean that you pay personal income tax on that allowance?
Originally posted by @Betty Cruz :
Does that example Cody L. mean that you pay personal income tax on that allowance?
Sort of. The way I do my accounting for the closing statement, the credit would show up under the "repairs" category. But as a negative amount. So let's say I put in $100k of actual improvements... Then it's a wash.
But if I were to do this, and buy a property that needed no work, then yes, I'd have negative $100k of repairs which would increase my NOI which would increase my tax liability. But on a large portfolio that is absorbed by gobs and gobs of desperation (from other properties and previous capx) .
Thank you @Cody L. that answer was very thorough and helpful.