Escrow vs. Pre-Closing Repairs vs. Allowances
Posted on | March 25, 2008 | No Comments
As promised, here is the skinny on getting repairs done in conjunction with a closing. Each method has its positives and negatives, which I will now outline.
Take the following example: home goes under contract, home inspection is completed, revealing the need for repairing a leak in the roof. Per the South Carolina Real Estate Contract, a seller is responsible for making the roof free of leaks. Should seller refuse to make the repairs, buyer has the right to withdraw from the contract, as long as they have submitted their request for repairs within 48 hours of the inspection date on the contract. So, seller needs to address the roof issue. At this point, seller has a few options.
1) Make the repair prior to closing. This can often be difficult for sellers, as they would need to come up with the money to complete the repair before receiving a check for the proceeds from the sale of the home. Seller could try to see if the contractor will do the work and then get paid after closing. This can lead to trouble if the sale falls apart. For small repairs, that are the seller’s responsibility per the contract, I usually think it is good to have them done prior to closing. This gets them out of the way, and the seller can shop around a bit to get the best price on having the repairs done. Note- repairs need to be done by a licensed contractor. If repairs are made prior to closing, even if the sale falls apart, then seller can put the home back on the market in better condition, and market the fact that a home inspection has been done, and repairs have been made. Also, if seller chose not to make repairs prior to closing, and then the sale fell apart, seller would then need to disclose the defects that the inspection turned up.
2) Escrow money at closing for the repairs. This is where seller gets a bid and signs a contract to have the work completed, with a licensed contractor. Closing attorney agrees to withhold the appropriate amount of money from seller’s proceeds at closing. Contractor goes and does the work after closing, and attorney pays him the escrowed money. This can be good for costly repairs that seller cannot afford to make without the proceeds from the sale. Closing attorneys are sometimes reluctant to do this, as it complicates things on their end, but there are plenty who will do it. Also need to run this by the mortgage company.
3) Deduct money from the purchase price. This can work if it is a minor repair, or one that the buyer doesn’t really care about getting fixed, or if the buyer has plenty of cash. Often, this is more appealing to the seller than it is to the buyer. With money deducted from the purchase price, buyer only saves about $6 per $1000 deducted on their monthly payment. Buyer also has to come up with the cash to make the repair. However, seller likes this option, because they don’t have to mess with paying money before closing, or finding a contractor. This can be a good option for minor repairs that the buyer is comfortable doing themselves (or getting friend to do in exchange for a six pack and dinner). In this case, it often works if the seller just deducts some money from purchase price to make up for buyer’s time, minor expense, and hassle.
4) Pay some closing costs. Similar to deducting from the purchase price, except this option leaves the buyer with a little more cash in hand. Instead of doing repairs, seller pays some of buyer’s closing costs. Buyer has to bring less money to closing, seller doesn’t have to make repairs prior to closing. Buyer makes the repairs with the extra money after closing. May need to double check with the lender to make sure they are okay with this option.
What lenders ARE NOT okay with, and should never be done, is having the seller write a check back to the buyer at the closing table. That is considered to be fraud, and mortgage companies are not so keen on that. They like everything to be on the HUD.
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