The contract says 285,000 dollars for the property. Buried in an addendum, somebody wrote that 12,000 dollars of that is for the appliances, the washer and dryer, the window units and the furniture in the two furnished units, and that the seller will deliver a bill of sale at closing.
That addendum just changed the loan. Not the purchase, the loan. Your lender does not lend against washers. It lends against real property, and you told it in writing that 12,000 dollars of your purchase price is not real property.
Most investors write that allocation to save a few hundred dollars in transfer tax, or because a seller asked for it, or because an accountant mentioned depreciation. Very few run the financing math first. Here is what it actually does.
Real property, personal property, and the line between them
Real property is the land and everything permanently affixed to it. Personal property is everything that walks out the door. The gray zone between them is called a fixture, and the test courts use is roughly: how is it attached, how adapted is it to this specific building, and did the parties intend it to stay.
A built in dishwasher is usually a fixture. A freestanding range plugged into a 240 volt outlet is usually personal property, and so is a refrigerator, a window air conditioner, a portable dehumidifier, and every stick of furniture in a furnished rental. A wall mounted microwave over a range is a fixture most of the time. A water heater is always a fixture.
Your lender has its own stake in this line, because its security agreement reaches some of the personal property too. That is the mechanism behind the UCC-1 and the fixture filing, which covers what gets claimed where and why fixtures get filed in the land records rather than with the Secretary of State.
What the allocation does to your loan amount
Here is the arithmetic that surprises people.
On a purchase, your loan is sized against the lesser of the appraised value and the contract price. But the contract price the lender uses is the price of the real property, not the gross number at the top of the page. If the contract allocates 12,000 dollars to personal property, the real property price is 273,000 dollars, not 285,000.
At 75 percent loan to value, that is the difference between a 213,750 dollar loan and a 204,750 dollar loan. Nine thousand dollars of additional cash you have to bring, on a line item you added to save a few hundred in tax.
And the appraisal does not rescue you. An appraiser valuing a single family rental is valuing real property. If the appraisal comes in at 285,000 dollars and your contract says 273,000 of it is real property, the lender takes the lower number. The way appraisers build that value out of comparable sales is worth understanding, and it is laid out in the adjustment grid. Note also that you do not get to steer any of this, because you do not choose the appraiser, as covered in who actually orders your rental appraisal.
What it does to your ratio
Follow it through the coverage calculation, because the second order effect is the one that bites.
Take the 285,000 dollar purchase with 12,000 allocated out. You wanted 213,750 in financing and you can only get 204,750. To keep the deal, suppose you accept the smaller loan. At 7.375 percent on a thirty year amortizing structure, principal and interest on 204,750 dollars run about 1,414 dollars a month. Add 395 dollars of taxes and insurance and the payment is roughly 1,809 dollars. At a market rent of 2,375 dollars, coverage is 2,375 divided by 1,809, or 1.31.
That is a better ratio than the larger loan would have produced, which is the one piece of good news. On the 213,750 dollar version, principal and interest run about 1,476 dollars, the payment is about 1,871, and coverage is 2,375 divided by 1,871, or 1.27. So the allocation improved your ratio by costing you nine thousand dollars of leverage. If you would rather have the leverage, the allocation is working against you. If you were going to fail a 1.25 floor without it, it just saved the file. Know which situation you are in before you sign the addendum, and run both versions through the DSCR deal calculator. The underlying math is in how to calculate DSCR.
The bill of sale, and why your lender wants to see it
A bill of sale is a one page instrument transferring title to the listed personal property. It is not recorded. It names the items, states the consideration, and warrants that the seller owns them free of liens.
That last clause is the one underwriting reads. If the seller financed the appliances, or if the previous owner’s lender filed a blanket UCC against the seller entity that reaches equipment at the property, your free and clear appliances may not be free and clear. The same problem shows up in a more expensive form with leased solar and leased equipment, which is covered in solar panels or leased equipment and how it hits your ratio.
Ask for the bill of sale during due diligence, not at the table. Read what is on it. A seller who will not list the items specifically is telling you something.
What usually goes wrong
The allocation is invented. Somebody writes 15,000 dollars for a used range, a used refrigerator and a nine year old washer. Those four appliances have a realistic used value closer to 1,200 dollars. An inflated allocation is a tax position, not a valuation, and it is the kind of position that looks bad in an audit and does real damage to your loan in the meantime.
The items never show up. The appliances in the listing photos are not the appliances in the kitchen on closing day. There is no appraisal step that catches this, because the appraiser is not inventorying your refrigerator. Walk the property the morning of closing. Photograph what is there.
It gets confused with a seller credit. A credit for appliances and an allocation of price to appliances are different animals with different effects. A credit reduces your cash to close and is capped by program rules, which is the subject of seller concessions and credits. An allocation reduces the real property price and therefore your loan. Investors regularly ask for one and get the other.
It lands on the settlement statement wrong. The personal property line should appear in a way that does not reduce the sales price the lender underwrote without everybody agreeing to it. Read the figures before closing day. How to read that document line by line is covered in how to read your closing statement, and the other prorated items that sit alongside it are in prorations at closing.
Furnished rentals are the hard case
On a furnished short term or midterm rental, the personal property is not a rounding error. Beds, sofas, dishes, linens, televisions and a stocked kitchen can be twenty to forty thousand dollars of real money, and the business does not function without them.
This creates a genuine conflict. You need the furniture, the furniture is worth something, and every dollar you assign to it is a dollar your lender will not lend against. The practical answer most investors land on is to keep the contract allocation modest and honest, buy the furniture package in a separate transaction at a separate price, and not try to make the purchase money loan finance the contents. Financing contents through a real estate loan is not a product that exists on the investor side.
Insurance follows the same split. Your landlord policy’s contents coverage is a different limit from the dwelling coverage, and a furnished rental needs it set deliberately rather than by default. What lenders require on the policy itself is in insurance requirements on a rental.
Three questions to answer before you sign the addendum
Does my loan amount move. Multiply the allocation by your loan to value. That is the cash it costs you. If the answer is nine thousand dollars and the tax saving is four hundred, you have your answer.
Is the number defensible. Would a reasonable person pay that for those specific used items. If not, take it out.
Do I actually need the items. On an unfurnished long term rental, the appliances matter and the rest usually does not. What you keep, repair or replace in the first year is a separate decision, worked through in the furnace, roof and water heater decision. And if the seller is staying past closing, the condition of what conveys gets harder to police, which is part of why seller rent back deserves its own attention.
What it does on a refinance
The purchase allocation follows the property into every later transaction, and investors are regularly surprised by that.
On a rate and term refinance two years later, the lender is sizing against appraised value, so the old allocation does not directly bind. What it does instead is sit in your file as a prior statement about what this property is worth as real estate. If you told the world that 12,000 dollars of a 285,000 dollar purchase was appliances and furniture, and you now want an appraisal supporting 320,000 dollars of real property, nobody is going to accuse you of anything, but the underwriter reading the purchase documents will notice the gap.
The larger effect is on your depreciation schedule and therefore on what your accountant has been reporting. Personal property depreciates on a short schedule and real property on a long one. If you allocated aggressively at purchase to accelerate deductions, you created a basis split that has to be carried consistently. That is a question for your own accountant rather than your lender, but it becomes a lender question the moment the two sets of numbers disagree in the same file.
There is also a disposition consequence. When you sell, the buyer will want their own allocation, and if your allocation and theirs do not line up, the gap shows up in the closing documents. None of this is fatal. All of it is friction, and friction on a deal with a thin margin is the whole margin.
The three documents that have to agree
Before closing, put three things side by side and read them together. They are supposed to tell the same story and frequently do not.
The purchase contract and any addendum. This is where the allocation is created. Read the exact language. There is a meaningful difference between a contract that says the price includes the listed appliances at no additional value and one that says 12,000 dollars of the price is allocated to personal property. The first changes nothing. The second changes your loan.
The bill of sale. The items listed here should match the items described in the contract, with no extras and no omissions. A bill of sale that names a refrigerator the kitchen does not contain is a document nobody will stand behind later.
The settlement statement. This is where the allocation either shows up as a reduction in the real property price or does not. If the contract allocates and the settlement statement does not reflect it, somebody is going to have to decide which document controls, and that decision will happen on closing day with a wire pending.
Thirty minutes with those three documents during the inspection period prevents the whole category of problem. The work is reading, not negotiating, and it is work the investor has to do because no other party at the table has a reason to care how the allocation affects your loan amount.
The short version
Every dollar you allocate to personal property is a dollar of purchase price your lender will not finance. Allocate honestly, allocate small, and get the bill of sale in writing with the items named. If you are structuring a purchase where the contents matter and you want the financing consequences priced before you sign, get in touch. And if the entity taking title is new, read signing before your entity was formed before the deed goes out.
FMC Capital is a Pittsburgh-based mortgage brokerage, NMLS #1840537. We place loans on rentals and flips for investors across Pennsylvania and additional states. Reach us at 412-990-2941. Loan terms, program parameters and pricing vary by lender and by property and are subject to change. Nothing here is legal or tax advice; allocation questions should go to your own accountant and attorney.