Decorative Allowance
Encyclopedia
Decorative Allowance is a real estate
term seen in realtors' marketing media (MLS
, flyers, etc.) to inform buyers that the seller is willing to help contribute to a portion of the costs of renovation at closing
or settlement. The allowance functions as an incentive for the buyer.
Typically the amount and purpose of the allowance is noted in an addendum to a standard real estate contract
and would appear as a credit on the HUD-1 settlement sheet to be used by the buyer towards payment of his closing costs or down payment
(if permitted by the lender).
Depending upon the state of the real estate market, homes being offered for sale may include a "Decorative Allowance". In the hot market which existed throughout the US between about 2000 and 2005 it was less likely to find such a thing. In slower markets (as appears to the case in 2006/2007 on the East and West coasts) where many more homes are being offered for sale, it is more likely that such incentives will be offered.
, thus freeing up money for other expenses. In fact, this credit may cover the buyer's closing costs, although ostensibly being designed to cover improvements to the property.
The advantage to the seller is that it helps address a property's need for simple decorative improvements such as paint, carpet, etc., without risking an up-front investment in improvements that may not be to every buyer's taste.
The term "with acceptable offer" is key. Even if the buyer in this example makes a full price offer, there may be other aspects of the offer (contingency offer, closing too soon or too far into the future, etc.) that make the seller unwilling to honor the offer of the $10,000
allowance, and by using the term "with acceptable offer" (or similar language) they reserve the right to revoke that offer or reduce the amount of the contribution.
A buyer may request such a contribution, even if it is not offered by the seller, but buyers might best inquire as to whether the seller would be willing to entertain such an offer before presenting it.
's commission
is typically based on the actual sales price of the home, so in the example above, many listing agents would still collect a commission on the $450,000 amount, even though the seller's effective net sales price was $440,000 (owing to the $10,000
they are giving back to the buyer). A seller planning to offer such an incentive might ask their agent if she would agree to base her broker's commission on the sales price minus seller's contributions, and if so, to make sure that agreement is reflected in the Listing contract.
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...
term seen in realtors' marketing media (MLS
Multiple Listing Service
A multiple listing service is a suite of services that enables real estate brokers to establish contractual offers of compensation , facilitates cooperation with other broker participants, accumulates and disseminates information to enable appraisals, and is a facility for the orderly...
, flyers, etc.) to inform buyers that the seller is willing to help contribute to a portion of the costs of renovation at closing
Closing (real estate)
Closing is the final step in executing a real estate transaction.The closing date is set during the negotiation phase, and is usually several weeks after the offer is formally accepted. On the closing date, the parties consummate the purchase contract, and ownership of the property is transferred...
or settlement. The allowance functions as an incentive for the buyer.
Typically the amount and purpose of the allowance is noted in an addendum to a standard real estate contract
Real estate contract
A real estate contract is a contract for the purchase/sale, exchange, or other conveyance of real estate between parties. Real estate called leasehold estate is actually a rental of real property such as an apartment, and leases cover such rentals since they typically do not result in recordable...
and would appear as a credit on the HUD-1 settlement sheet to be used by the buyer towards payment of his closing costs or down payment
Down payment
Down payment is a payment used in the context of the purchase of expensive items such as a car and a house, whereby the payment is the initial upfront portion of the total amount due and it is usually given in cash at the time of finalizing the transaction.A loan is then required to make the full...
(if permitted by the lender).
Depending upon the state of the real estate market, homes being offered for sale may include a "Decorative Allowance". In the hot market which existed throughout the US between about 2000 and 2005 it was less likely to find such a thing. In slower markets (as appears to the case in 2006/2007 on the East and West coasts) where many more homes are being offered for sale, it is more likely that such incentives will be offered.
Benefits to buyer and seller
The advantage to the buyer is that allows him/her, in effect, to include the cost of improvements in his mortgage loanMortgage loan
A mortgage loan is a loan secured by real property through the use of a mortgage note which evidences the existence of the loan and the encumbrance of that realty through the granting of a mortgage which secures the loan...
, thus freeing up money for other expenses. In fact, this credit may cover the buyer's closing costs, although ostensibly being designed to cover improvements to the property.
The advantage to the seller is that it helps address a property's need for simple decorative improvements such as paint, carpet, etc., without risking an up-front investment in improvements that may not be to every buyer's taste.
Example of its use
A seller has offered a property at a sales price of $450,000 with a $10,000 decorative allowance "with acceptable offer". A buyer makes a full-price offer, and all the other terms of the offer are acceptable to the Seller. The sales price on the contract would be $450,000, but $10,000 would be taken from the seller's proceeds at closing and used to cover some of the buyer's closing costs, so the seller's net sales price would in effect be $440,000. That amount, minus commission, seller's closing costs, and their loan payoff would be their net proceeds (the check they receive at closing).The term "with acceptable offer" is key. Even if the buyer in this example makes a full price offer, there may be other aspects of the offer (contingency offer, closing too soon or too far into the future, etc.) that make the seller unwilling to honor the offer of the $10,000
allowance, and by using the term "with acceptable offer" (or similar language) they reserve the right to revoke that offer or reduce the amount of the contribution.
A buyer may request such a contribution, even if it is not offered by the seller, but buyers might best inquire as to whether the seller would be willing to entertain such an offer before presenting it.
Effects on the "net" price and Realtors' commissions
A real estate brokerReal estate broker
A real estate broker, real estate agent or realtor is a party who acts as an intermediary between sellers and buyers of real estate/real property and attempts to find sellers who wish to sell and buyers who wish to buy...
's commission
Commission (remuneration)
The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. Payments often will be calculated on the basis of a percentage of the goods sold...
is typically based on the actual sales price of the home, so in the example above, many listing agents would still collect a commission on the $450,000 amount, even though the seller's effective net sales price was $440,000 (owing to the $10,000
they are giving back to the buyer). A seller planning to offer such an incentive might ask their agent if she would agree to base her broker's commission on the sales price minus seller's contributions, and if so, to make sure that agreement is reflected in the Listing contract.