What is a “Carpet Allowance”?

carpet alloawnceCarpet allowance. Painting allowance. My house needs some upkeep allowance.

Whatever you want to call it, the idea is that the home owner doesn’t want to spend the money to replace the carpet or paint or do whatever. Instead, they want to provide the potential home buyer with some money to do it themselves once they move in. Sometimes this shows up in the actual sales price of the house. Price A for a pristine, move-in, updated home. Price B for a house that’s seen some wear and tear and needs a little fixin’ up.

A lot of the time, though, it shows up in what home owners like to call the carpet allowance. This is where the home owner says, “Ok, Mr.& Ms. Home Buyer, I know the carpet is a little worn out. You probably would like to replace it. Why don’t we offer a $4,000 carpet allowance so you can put the carpet of your choice in once the deal is closed.”

There Is No Such Thing As “A Carpet Allowance”

The intention is a good one but, unfortunately, there is no line item on the final settlement statement that says “Carpet Allowance” or “Painting Allowance” or “New Kitchen Allowance”. In fact, such a line item might be a red flag to mortgage companies about the overall condition of the home and they might not want to lend the money to the home buyer to buy the house.

Whoa! Would that ever be bad news for everybody!

There is this thing called a “Seller Credit to the Buyer”. It can be a percentage of the sales price or it can be a certain dollar amount. It’s perfectly acceptable to mortgage companies.

Why?

The “Seller Credit to the Buyer” doesn’t specify how that credit can be used.

Sure. The buyer can use it to install new carpet or paint or whatever. What it’s really used for, though, is to defray some of the buyer’s out-of-pocket, cash costs associated with buying the house. Things like the appraisal or title insurance or the transfer and recordation fees charged by the State and County.

You see, if the buyer doesn’t have to come out-of-pocket for all those closing costs, they have cash to pay for carpet or paint or the new kitchen.

So, it’s not really a “carpet allowance”. It’s the “anything I want to use it for but it’s really to eliminate some or all of my closing costs” allowance.

Of course, the net effect to the home seller is the same as if they lowered the price of the home. Whether they decrease the price of the house or they offer a Seller Credit to the Buyer, it’s all the same. The net proceeds they receive after all their costs (like paying off the mortgage) will be reduced by whatever the give the buyer in the form a of credit.

Fix It Or Leave It Alone?

Your Realtor should be able to help you with estimating your net proceeds. They can tell you what you might pocket if you sell for Price A or Price B and what you might pocket if you provide the buyer with a credit toward their closing costs.

That way you can decide whether it might be cheaper for you to put in a new carpet or just have it professionally cleaned. You can decide that you would rather not deal with contractors and all the disruption that causes and price your home accordingly.

It’s really more of art than a science. Everything sells at the right price. Pumping a bunch of money into a home may not be worth it. It may be cheaper to offer a Seller Credit to the Buyer. On the other hand, a pretty home in pristine, move-in condition can command a higher price and it will almost certainly sell a whole hell of a lot quicker.

Talk it over with your Realtor to see what makes sense. Remember, though, it’s not a “carpet allowance”.

About Ken Montville

Ken Montville is a RealtorĀ® and Associate Broker with RE/MAX United Real Estate in the beautiful Maryland Suburbs of Washington, DC. He has been selling nice homes since 1999. Way back in the 20th Century.

When Ken Is not doing the real estate thing he can be found all over social media in places too numerous to mention and he listens to jazz, reads a little (mostly non-fiction), hangs out with the Rotary Club of College Park, MD and can be found blogging at MDSuburbanHomes.com