Seller holding funds in escrow for repairs or lowering price?

Question

Hi BP community! My husband and I are in the process of buying our first property, a residential 4bd, 1 ba house in the Catskills in NY. The 2,500 sqft house was purchased 2 years ago as a foreclosure for $140K and flipped by the current owner. There are still some repairs to finalize the house: change broken windows, complete the flooring and trimming in the bedrooms, one log-side of the house, add one bathroom. Though, the house was put on the market at an asking price of $400K with multiple offers at $460K, price at which we secured it in contract.

After all the inspections, the biggest issue that we learned only after getting into the deal since the owner did not know and that there were 5ft of snow outside, was the conditions of the septic system. It is basically a grandfathered 1-bd metal cesspool that is over 20 year-old. The sellers have agreed to give credit for half of the safety &  health related issues/repairs but only wants to cover the septic replacement with an escrow account as they're hoping that we'll handle the replacement, get reimbursed by the Department of Environmental Conservation/ Catskill Watershed Corporation (CWC) and refill the escrow to reimburse the sellers. After hours of calls with these governmental agencies, there is nothing less certain as a reimbursement from them since the relevant program is closed and does not have a reopening date as of today.

We've offered to lower the price of the house to its actual value aka Initial offer price minus all the agreed upon repairs incl. septic aka ~420K which is still 10% above the initial asking price. Though, there are many intermediaries for which it is not their best interests and the seller has so far sticked to his position with the escrow account.

Per the condition of the septic, my husband and I recognize the need to change this outdated septic system asap whereas the sellers does not. We countered the last escrow account proposal with having access to $10K for the get-go and only be tied to reimbursed the seller 50% of what we'd receive from the CWC for up to 6 months after the purchase of the house. Even writing this is irritating to me as it is convoluted and very favorable to the sellers.

As anyone used an escrow account in that fashion? Has anyone worked with the DEC or CWC in NY and has any feedback to share?

At $460K, the maths still works regarding what we plan to do (live & do short time rental once done with the repairs) but it is clearly way tighter than if we were buying it at what seemed to be a fair price.

Thank you in advance for any comments/ recommendations!

Samantha Cash · Answer

I'm glad the estimate was in the range you were thinking. I agree with the observation that houses just outside of towns that only need light renovation have the best returns. I'm learning the design makes a huge difference as you mentioned. Thanks for sharing the update!

Coco Poyet · Answer

Hi Samantha - Apologies for the delay and thank you very, very much for your reply. We had initially planned for a 4-bedroom septic that costed ~$30K for installation. We followed your advice and completed the perc test. The estimate did not came back more expensive but we did learn about the soil and got verbal approval from the code enforcer that we could perform the required work.

Regarding the investment, we are at the stage where all the actual costs of the mortgage are coming to light. Even with the mix use we were planning to have, it is going to be a challenge to come out positive (i'm not counting much on capital gain being the price we're buying it at). From friends who are doing a similar model, it seems that the 200K/300K residential houses close to a nice town but that needed light reno and a good eye for interior design get the best ROI. But as you're mentioning, that is for now and only until the STR laws changes.

Samantha Cash · Answer

I'm glad you were able to work it out and get a credit. I hope you will still be able to take advantage of the CWC program. Note, the program is from NYC Department of Environmental Protection for any areas that drain to the reservoirs. The NYC drinking water that comes from the reservoirs west of the Hudson isn't filtered, so these programs are important to make sure the water quality says high enough that it doesn't need to be. I interned for NYC DEP in Kingston though it was in a different department so I'm not sure exactly how this program works. There is also a whole team on conversation officers that are working to stop (and fine) pollution in the watershed, though I don't know if they deal with septics or not.

Do you mind me asking how much you are budgeting for the septic? I saw the CWC said $15k was the average, but I've heard horror stories of $50k septics. If you have gotten an estimate yet, the contractor or engineer should have done a perc test to get an idea of how the soil drains. If more material will need to be brought in that will increase costs.

I'm very curious as to how this deal will work out for you. I would love to break into the STR market in the Catskills, but I don't think there are many great properties right now which offer multiple exit strategies. With the market for selling up 30% I'm assuming resales will be at a loss. I haven't ran the numbers on long term rentals in the Catskill park but I know the average incomes are low. It's different when it's a blend of personal and investment as it sounds like this is for you. My first property was as well, and the long term rental profit isn't great.. hence why I'm looking at short term.  Lexington in Greene County just had a board meeting and she mentioned something about Ulster County as a whole, though I'm not sure exactly what they were thinking.