Rehab Allowance After Closing. OK Or Should I Run?
Just getting into the nitty gritty of my first investment property. Hit a small snag and I need some advice from the teeming millions who use this sight.
Agreed on a contract w/ seller for 265k w/ 15k coming back to us at closing for cosmetic rehab.
Snag #1- Mtg co will only allow 2% back.
Snag #2- Seller cannot pay us the $9300 difference until he obtains cash from closing.
I don't want to close on a house and HOPE Mr. Seller decides to honor the agreement and I don't want to have to go thru a lawsuit to collect it back.
Suggestions? 
Restructure the contract (ammend the closing instructions) so that a portion of the rehab money is for byuer closing or lending costs not rehab. This will free-up the money you would have had to bring in to the closing. How you contractaully allocate the money should be pre-arranged with your lending representitive to avoid these problems.
Second suggestion -Have some of the rehab work (paint, carpet, roof, or whatever you would not be doning yourself) estimated and invoiced by your contractors through the closing process. In that way the seller pays the contractors (not you) through closing and you have a credit with the contractor to get the work done later. It is even possible to have the checks drafted by the closing agent payable to the various contractors but given to you for "delivery." Now you can hold the check until the work is done (watch the expiration dates on the checks!).
Excellent Post Richard!
Well I just checked with my settlement company and they basically said the same thing Richard said in his post above, however in order to do it we need preapproval with the lender. They also indicated any side agreement would not be binding and could be construed as defrauding the lender.
I don't want to do anything illegal or unethical. I think the best way to do it is to rewrite the contract for 250k w/ the owner paying 2% closing costs. Any other ideas on how to get around this. Could the lender be persuaded that the money is going to be used to repair the house and finish the basement.