Decorative Allowance (or Decoration 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.
Contents
- Benefits to buyer and seller
- Example of its use
- Effects on the net price and Realtors commissions
- References
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 United States 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 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 broker'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.