Providing an allowance when selling a home
One of the biggest points of contention between home buyers and sellers comes down to how much work should be done on the property before it changes hands. Many a deal has fallen through as the parties squabble over what should be done and who should foot the bill.
Most purchases include a home inspection, where a buyer can ask a seller to complete repairs or lower their price to account for serious structural issues such as an aging roof. The inspection won't cover matters of taste or convenience. If a buyer dislikes the dining room wallpaper or is dismayed that there isn't a central air conditioning system, it's up to them to remedy the issue, not the seller.
Nevertheless, real estate agents often present sellers with a long list of suggested upgrades to make their property more appealing to buyers. Rather than spend a lot of money completing all this work, a seller may consider crediting the buyer with an allowance.
An allowance takes into account all or some of the upgrades needed to improve certain features; the buyer is then offered a credit reflecting the expense. A listing may specifically say that the seller is offering an allowance for painting, flooring, decorating, or some other reason. Elizabeth Weintraub, writing for the financial site The Balance, says buyers in markets tipped against the seller may even ask for an allowance if they dislike some aspect of the home.
Sellers who want to provide an allowance should determine what this incentive will entail. Terri Williams, writing for Realtor.com, recommends meeting with your real estate agent and lender to discuss the issue. Your agent can provide some guidance on how to offer an allowance, such as whether it will be a cash credit or simply a discount applied against the sale price or closing costs.
The lender can advise you whether an allowance may result in any problems, such as disruptions in the appraisal. Weintraub says lenders often let buyers accept cash credits of up to 6 percent of the sales price.
Ask for a few estimates from reliable contractors as to the cost of the project. This process will ensure that your allowance won't be excessively high, and will also provide supporting documentation to any buyers interested in buying your home and accepting an allowance.
The biggest advantage of an allowance is that it allows the buyer to fix a flaw in a way that appeals to their own tastes. Williams says sellers who upgrade a home may find that the color scheme or other aspects of the completed project aren't appealing to buyers. By acknowledging the need for updates, offering a credit toward the project, and letting the buyer choose their own finishes and other touches, the listing can be more appealing.
Allowances have several disadvantages, however. Diane McDermott, writing for the real estate professionals' resource ActiveRain, says buyers usually prefer to find a home where they need to complete little if any work before moving in. Even with the offer of an allowance, they may be dismayed enough at the appearance of outdated features in the home to simply pass it by.
If the seller acknowledges a flaw with one part of their property, buyers may believe other parts of the home are less desirable as well. Harry Tishler, writing for the Indianapolis company Tish Flooring, says buyers may also have unrealistic expectations and think that the allowance being offered is too low.
Buyers may see the offer of an allowance as a sign that the seller is desperate to move or otherwise more likely to negotiate. This may increase the chance that you'll receive lowball offers or demands for other incentives.
Depending on the market, an allowance may not be necessary at all. In areas with strong demand and limited inventory, buyers will be more willing to put in the necessary work or money to upgrade the outdated features of an available home.
Before considering an allowance, you may take some simple steps to spruce up your home. Taking steps such as repainting the walls, replacing old carpeting, and having the property professionally cleaned can vastly improve the appearance of the residence.
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