How to arrange a Repair Escrow?

Question

I'm under contract on a home (primary residence) that needs major work to building systems and updating. Part of my realtor's recommendation was to offer asking price plus $20k to be given back to us for the work. The sellers have agreed, and the appraisal came back high enough to support it.

I have acceptable bids for the work I will not be self performing. The $20k will cover the work on the major systems plus a little left over to help with the updating costs.

My realtor says the money needs to be paid to the contractors at closing. Being a construction professional, I NEVER prepay for construction work. I'll make progress payments or pay at completion, but NEVER, EVER prepay the full amount upfront.

I'm looking for another option to keep the money in my control. I can understand the bank not allowing me to get a lump sum (but they trust contractors?).

I've done some reading on repair escrows. It sounds like the title company holds the money and issues the payments as the work is completed. I'd be fine with that. Once the contractors are paid for their work, can the account be set up to release the remaining funds to me, or reimburse me for expenses if I provide receipts?

Does anyone have experience on this? Can I get some tips?

Cherie Orellana · Answer

I would talk to your lender.  The lending side is where the issue is.  Explain the situation and brainstorm ideas.  The checks will have to be direct from title to contractor.  The excess you should be able to work into the deal somehow as mentioned above.  If none of the other idea work , you could just reduce the purchase price that left over amount.  I would try to apply it in other ways first though.  Like closing costs or buying down your rate.

Cherie Orellana · Answer

I typically work with Scott Morgan with old republic when working in utah county.

On complex or creative deals, Debbie Hemingway with Utah Title has been great.  she is one of the only escrow agents that can follow my crazy and creative ideas and help make them happen on her side of the business.

Cherie Orellana · Answer

@Marc Macialek

I would have the title company pay the invoice.   If you want it paid in increments or you want to hold the check, you could have the title company cut the check written to contractor but you pick it up.

I have done this a few times where I also ask they divide the payment into 2 checks. This way, I pay the contractor half up front and the other half I give them upon completion.   I imagine you could divide the payments any way you want.  As long as the money is direct from title to contractor.

I just read more of the replies and the problem you will run into is lender requirements.   Even if buyers and sellers agree to the terms, a lender will not allow money back into a buyers pocket. I would imagine there are some creative ideas you might be able to work out to make it work.  For instance, they could pay $16,500 in repairs to be paid to contractor and the other $3,500 they contribute to your closing costs.  Use the extra to buy down your rate, have them pay a couple year home warranty, etc.

Louis Jeffries · Answer

The title company is the answer and you can also have funds specifically set aside for self improvements of upgrades. the one benefit not mentioned is the releases the contractors sign off to get their funds. This protects you in case the contractors want to lien your property or claim you did not pay them.

@Marc Macialek

Jeff Dellitt · Answer

Everything just needs to be spelled out in the Escrow Agreement, which is signed by both parties.  If the seller has agreed to provide 20k at closing, I don't know why he would really care about the specifics of the repairs.  He has his money, and is ready to move on.  Just make sure you put something in there that allows you to use any remaining funds on buyer-performed repairs or materials.  I don't think this needs to be complicated.  However....

Was the 20k for repairs addendum included in your paperwork submitted to the lender?  Most, if not all lenders, require repairs to be done prior to closing.  This may be why you are being told to pay the contractor at closing.  Most lenders will not allow a repair escrow unless there are extenuating circumstances.  If the lender is unaware of the 20k, you can do whatever you want as long as both parties agree, as stated above.  This, however, could be considered mortgage fraud.  In one case in our area, a Realtor, attorney and two investors were convicted of mortgage fraud for receiving cash back from sellers without the lender's knowledge.  Granted, this was an ongoing practice, but the principle is the same.

John Warren · Answer

@Marc Macialek if you are in an attorney close state then your attorney can hold the money. If you are in a title close state, then your title company can hold it. Your gut instinct is correct. Do NOT give 20k to a contractor with no recourse for work not performed. That would be a terrible mistake.

John Warren · Answer

@Marc Macialek yes call the title company directly and they can explain. I am sure there will be a fee for this, but it is probably nominal. I am not sure as to you keeping the leftover money. In Illinois, if you don't use the repair money I believe it reverts to the seller (which is how I propose them normally in negotiations). Your state would be different, but your title rep can help here.

Steve Morris · Answer

"And I want to complete the repairs after closing, so I have control of who does the work and scheduling it."

OK< I guess I understand getting in with skinny money.

Then you'd better get something you both agree on for escrow to do draws and make sure it is understood by ALL.  Escrow hates doing reserves since anything needs mutual agreement and once a seller sells, he's a lot less "accomodating" usually.

Steve Morris · Answer

Why not just ask for a $20K credit on the price?

It sounds like you want the seller to make the repairs?  Problem is that the seller's idea of an acceptable repair is different from a buyer's.  Then you get the seller's that "forget" to put the check in the mail to the contractor.

Marc Macialek · Answer

@Cherie Orellana, thanks for the ideas on alternate ways to keep the money in my pocket. The closing costs seem like a great idea.

Also, thanks for the time you’re taking to respond here.

My realtor is explaining that the repair money is on the HUD paperwork for the seller, and not mine. He also reviewed that structure with the lending agent, who said it was fine.

I’m not sure what HUD paperwork is, since I’m doing a conventional loan.

This all seems like a trial by fire for a first home purchase. But it’ll be that much better for me on the next time around.

I left messages with both title companies you gave me. We’ll see what I can learn from them.

How to arrange a Repair Escrow?

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