What is a Repair Escrow?

What is a Repair Escrow?

It is several days before the scheduled closing and the rainy weather is delaying the installation of the new roof on the property being sold. If the closing is delayed, the buyers will lose the lock on their interest rate. The decision is made to contact the closer to see if it is possible to hold an escrow for the payment of the roof completion. Situations like this arise from time to time during the closing process.

Essentially, a repair escrow is an agreement between the Buyer and Seller to set aside money to complete required repairs after the transaction closes. The lender or title company (“escrow holder”) holds the funds until the agreed upon repairs are completed. An escrow agreement will be provided by the escrow holder, and signed by the buyer, seller, escrow holder, and in some cases, the new lender. The agreement will establish the rules of the escrow, such as, which party will initiate the repair, and how the escrowed funds are to be disbursed.

Benefits of a Repair Escrow
–Relieves the Seller of covering the repair costs before closing.
–Eliminates the burden of the completion of repairs before closing.
–Offers financial protection to the Seller.
–Since the work is being done after closing, the Buyer can ensure that the repairs are done properly and in a timely manner, without having to pay out of pocket or wait for the Seller to reimburse them.

Cons of a Repair Escrow
–May reduce the Buyer’s bargaining power or leverage in negotiating the price or terms, given that buyers are essentially accepting the property “as is.”
–Can expose the Buyer to unforeseen problems or expenses if the repairs turn out to be more expensive or complicated than expected.
–It reduces the net proceeds of the Seller.
–Can create uncertainty or stress if the Buyer is not satisfied with the repairs or if they try to renegotiate the deal.

Alternatives to Repair Escrow
–The Seller can try to finance the repairs themself.
–Parties may consider other options, such as adjusting the asking price of the property.
–The Seller can offer a credit to the Buyer to cover the cost of repairs.
–The Seller may offer a home warranty or insurance policy to cover any future defects or damages.
–The Seller can sell to a real estate investor who will make the repairs themselves.

Other Information
All escrow fees, whether the transaction is residential or commercial, are filed with the Division of Insurance and cannot be negotiated .

Most Closers will direct Realtors to provide an Amend/Extend to Contract for the repair escrow. Be as clear and specific about the work to be completed as possible, it is best to provide an itemized list with estimated amounts for the different work to be done.

An escrow agreement, detailing specific/special instructions for the repair escrow, will be provided at closing and signed by both Seller and Buyer. The parties should read the agreement to make sure it matches their expectations. A new escrow agreement is prepared for each file, and the terms may vary depending upon the escrow holder, the details of the transaction, and the expectations of the parties. Specific matters to look for include:
Which party is responsible for performing the work?
By when must the work be completed?
How and when will the funds be disbursed?

How will disputes be handled if the parties don’t agree on how/if the funds should be disbursed?

Land Title escrow agreements do not require that we independently determine if the repair(s) have been completed, we may rely on Notice that the work has been completed. Land Title is also not responsible for any warranty issues that may arise.

With Lender required repairs, the Lender provides the Notice that the repair(s) have been completed. This provides the Lenders with the assurance that the work has been done and to their satisfaction.

Finally, depending upon the nature and size of the contemplated repair, a repair escrow may impact any mechanic’s lien coverage offered by the title insurer.