Repair Escrow?? Perhaps. Perhaps Not. Check With Your Lender.

By
Real Estate Agent with Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate 303829;0225082372

"Oh!  You can just do a repair escrow and make the repairs after closing."

Or, can you???  Sounds easy, but no one promised that real estate transactions would be easy.  If they did, they may have misled you.  Actually, while real estate transactions do not become easier, our ability to handle them with ease increases year over year with experience.  If you've experienced a particular problem in prior a transaction, you're way ahead.

First of all, many loan types do not permit escrows of any type.  This is probably a good thing for buyers and sellers because it permits the security and finalty that buyer/owners need.   Buying a home with after settlement contingencies introduces risk, primarily to the buyer.  The person tasked with making the repairs before or after settlement is the same person who neglected the maintenance in the past. 

It's easy to say, "The title company will hold the escrow money until the repair work is completed."  However, few title companies are interested in holding these deposits.  Sure, they have escrow accounts but the owners of title companies also know that, while escrows are easy, the escrow contingencies are not always easy to release.  A seller who has not maintained a property is not the person on whom we can always rely to now make repairs.  Further, many title companies are not interested in acting as a repair cost bank. 

A Repair Escrow Will Not Cure Delayed Maintenance.

The property has multiple defects, all identified in the buyer's home inspection.  Normal procedure is for the buyer to write a Repair Addendum and for the seller to make the repairs prior to settlement.  The buyer verfies that the repairs have been made by reviewing the paid receipts of the companies that made the repairs.  If the repairs didn't require a licensed company, such as removal of trash and debris, the buyer will verify the cure at the pre-settlement walk-through.

Keep It Simple. 

                                   

Courtsy, Lenn Harley, Broker, Homefinders.com, 800-711-7988, serving home buyers in Loudoun County, Virginia.           

 


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Ambassador
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Joe Pryor
The Virtual Real Estate Team - Oklahoma City, OK
REALTOR® - Oklahoma Investment Properties

I have never liked the idea of  doing repairs after the closing. If repairs are done before and if there is a final walk through, then at the closing when the buyer signs off on the as is condition at the time of closing the chances of things going legal afterward are diminished. 

May 21, 2014 09:26 AM #17
Rainmaker
1,560,731
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

Good reminder.  Escrow hold-backs (our local term) can tip off underwriting to the fact that repairs need to be made to the property they're loaning on.  That can tie up the loan package they want to shuffle off on the secondary market.  And if escrow agrees to it, they have to take and hold 3 times the amount, because we all know that estimates are just that . . . estimates.

May 21, 2014 11:06 AM #18
Rainmaker
262,323
Kim & Kristine Halverson
Compass - Santa Monica, CA
Sisters, Realtors

Lenn, these escrow repairs issues are tricky!  Each client has different wants and needs.  Thanks for bringing this up.  Kristine :)

May 21, 2014 02:23 PM #19
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Rod.  Thanks.  The problem with requiring a third party, unless it's one of the agents using their escrow account is that the fee to pay a third party has to come from somewhere.

Joe.  You're absolutely right.  If repairs can't be made by the seller prior to closing, then there needs to be a credit to the buyers to compensate for the defects.  Problem is, how serious are the defects.

Carla.  All good points and show why property need to be maintained so these matters don't cause problems with closing.

Kristine.  Escrows will always be a problem.  Thanks.

May 21, 2014 09:24 PM #20
Rainmaker
146,165
Nogui Aramburo
Linda Craft & Team, REALTORS® - Raleigh, NC
Real Estate Professional in the Raleigh Area

We typically pay a contractor at closing from the sellers proceeds. This eliminates the lender being involved. However, if the repair is lender required, VA or FHA. Fuggedaboutit, it has to be done prior to close.

I am not ashamed to remind listing agents of deferred maintenance. I will say something like, "your seller has not upgraded or fixed anything in this house the last 20 years they lived here and now want to pass the bag to the buyer. Please tell your seller, the buyer is willing to take that responsibility, but wants the seller to make some of these critical repairs..." etc.

 

May 22, 2014 12:13 AM #21
Rainmaker
592,740
Than Maynard
Coldwell Banker Heart of Oklahoma - Purcell, OK
Broker - Licensed to List & Sell - 405-990-8862

I don't know of any loans that will allow repair escrows, unless you have a large down.

If you have enough money down to allow repair escrow then why not just reduce the price?

May 22, 2014 12:22 AM #22
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Nogui.  Good for you.  Agents in my area generally call for feedback.  When condition is a barrier, I tell them.

Of course, they say the house is priced for condition, but that's not always true.

May 22, 2014 12:24 AM #23
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Than.  Repair escrows are not as popular as they once were.  However, for some reason, they still exist. 

I prefer to write a repair addendum pursuant to the home inspection, or negotiate a credit if allowed by the lender.

May 22, 2014 12:26 AM #24
Rainer
482,047
Bruce Kunz
C21 Solid Gold Realty, Brick, NJ, 732-920-2100 - Howell, NJ
REALTOR®, Brick & Howell NJ Homes for Sale

Agreed, Lenn. Keep it Simple is always good.
The repairs, and whatever they may lead to, are the seller's responsibility. They need to be cleared up completely up prior to closing - either by actual repairs or credits - as acceptable to the buyer.
Bruce

 

May 22, 2014 03:07 AM #25
Rainmaker
750,320
Jeff Pearl
RE/MAX Distinctive / LIC in VA - Lovettsville, VA
Full Service Full Time Realtor

Exactly what you describe in your last paragraph has always been the best procedure for buyers and sellers to follow.

 "Normal procedure is for the buyer to write a Repair Addendum and for the seller to make the repairs prior to settlement.  The buyer verfies that the repairs have been made by reviewing the paid receipts of the companies that made the repairs.  If the repairs didn't require a licensed company, such as removal of trash and debris, the buyer will verify the cure at the pre-settlement walk-through."

May 22, 2014 05:20 AM #26
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Jeff.  Indeed.  My practice is to simply keep it simple.  Thanks.

Bruce.  In a perfect world, of course.  That said, I've had a few sellers who tried to get by with no or poor repairs.  Buyers simply must be willing to walk away.  However, when a buyer has moved and all their belongs on a truck, sometimes they are willing to take the house as it is and get on with their lives.

I did have one seller hold-out in Lovettsville where the seller got nasty in the end and the seller's broker gave the buyer a cash credit at closing.  That was a stand-up broker.

May 22, 2014 06:14 AM #27
Rainmaker
370,463
Travis "the SOLD man" Parker; Associate Broker
iXL Real Estate-Wiregrasss\ - Enterprise, AL
email: Travis@theSOLDman.me / cell: 334-494-7846

Good post. Also, sometimes what is thought, and budgeted, to be a minor repair will turn major once it has started - i.e., more $$$ needed. What then....?

May 22, 2014 06:20 AM #28
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Travis.  Indeed.  That's more likely when a home owners has neglected regular maintenance.

Thanks.

May 22, 2014 07:00 AM #29
Rainmaker
4,109,745
Joan Cox
House to Home, Inc. - Denver Real Estate - 720-231-6373 - Denver, CO
Denver Real Estate - Selling One Home at a Time

Lenn, these repairs have become quite the issue with some lender, and always best to check in before you even write an inspection objection.

May 22, 2014 07:14 AM #30
Rainmaker
3,137,612
Nina Hollander
Coldwell Banker Residential Brokerage - Charlotte, NC
Your Charlotte/Ballantyne/Waxhaw/Fort Mill Realtor

Increasingly, I see lenders insist that there be no repair escrows and that everything be done prior to closing.

May 22, 2014 07:42 AM #31
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Joan.  Of course they're an issue.  Lenders don't want to make investments in defective properties.

Nina.  As it should be.

May 22, 2014 07:28 PM #32
Rainer
207,740
Macy Babb ... North Georgia Realtor
Re/Max Around Atlanta Realtor - 404-234-6166 - Cartersville, GA
Realtor, SFR, HUD/REO Certified

I sell alot of HUD owned homes, and have used the repair escrows to my buyers advantange, especially the FHA 203K program.  There are alot of agents that will not show these homes because of the needed repairs, and I get my clients in with a minimum bid and then the "repaired" items are brand new.  WIN..WIN for me and my clients.  Example: my clients bought a home needing repairs for 70K, did a 203K mortgage with 35K in repairs and the after repair appraisal was for $135K. Great programs out there, if you have a good Lender and research the programs with them, so you can educate your Buyers of "all" their options.

May 23, 2014 01:36 AM #33
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Macy.  The last 203(k) that we did had a contract price of $197,000.  After $35K in repairs, the appraisal was $290 and the buyer was ecstatic.  So was their agent.

We had another one that found the perfect house, but they needed a garage.  Since most of the homes in the community had a garage, we were able to build a garage with the $203(k) program.  Sometimes you just have to try.

May 23, 2014 02:55 AM #34
Rainer
3,275
Matthew Hermanson
CEU Solution

Oh gosh, this story of mine is from around 1990 when I was a loan originator in Seattle.  So the repair escrow myth is quite old.  This story took place near the end of a very hot (30% appreciation per year for several years) real estate market.

After about 3 weeks or so had passed after the purchase and sale had been signed, we have the buyer's home inspection back and he/she called for some maintenance items.  The buyer and seller agreed as to what repairs would be made and paid for by the seller.  Of course the lender made those a condition of closing because the repairs were part of the entire purchase and sale.  We all should know that once something is in that contract to purchase, it will be completed or the bank will not fund the deal.  Period.

So out from under the rocks the listing agent finally crawls out and wants (not asked - wants) a repair escrow.  I'm the loan originator for the buyer.  I ask the listing agent how long she had been an agent.  She replied three years.  I told her then she KNOWS that we can't set up a hold back escrow for repairs.  Then the seller says that the market is hot and I'll just cancel the deal and re-list the house for $10K more.  Yes the market was hot but in hindsite was just about to peak and crash.  Those who were in the trenches in Seattle in the late 80's - early 90's would remember.

After I assured the buyers that a contract is a contract and to hurry up and wait, I "politely" explained to the listing agent also that a contract is a contract and that she had better see to it that the work is done and her seller performs.  I'm sure the buyers agent had the same heart-to-heart talk and the deal closed on time with all of the work completed.  But not until after the buyer's insurance company (USAA) drug their feet and I pulled my agent out of my hat and got the house covered for closing.  (always, but always have a homeowner's insurace agent or two in your back pocket for when the need arises)

So youngsters, the myths of repair excrow hold backs are but tales of old.  And like Clippers teams that can win championships and unicorns, repair excrows exist only in bedtime stories told by old brokers.

May 24, 2014 06:45 AM #35
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Lenn Harley
Lenn Harley, Homefinders.com, MD & VA Homes and Real Estate - Leesburg, VA
Real Estate Broker - Virginia & Maryland

Matthew.  When I hear the statement, "We'll just cancel and re-list", I long for a seller's escrow. 

May 24, 2014 07:17 AM #36
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