Mortgages & Creative Financing

3 Reasons to Use a Repair Escrow

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Repair Escrow

I'm in the process of negotiating the sale of a property to a retail buyer right now and was able to use a repair escrow as a compromise to my buyer's request to fix certain items. As is the case with many retail sales, the buyer performed an inspection and had a list of items they asked us to repair. The property was actually a home I'd been renting for the last few years and needed some updating – so I figured any buyer would make these types of requests. However, as I've written about before, I was not willing to simply risk $10,000 in repairs prior to closing without some sort of protection or recourse.

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These particular buyers asked for a number of upgrades (including a new roof) that totaled upwards of $10,000. I had anticipated spending some amount of money on the property as a result of an inspection, but definitely had no intention of laying out 10K without any guarantees or recourse that the loan would close. As such, we went back to the potential buyers with an offer to put $7,500 in a repair escrow that they could use at their discretion once the property closed. (A repair escrow is simply an agreed upon amount of money taken out of the sellers proceeds at closing and held by the escrow agent or attorney to be used by the buyer for specific repairs made after the closing)

Three Things We Accomplished by Using a Repair Escrow:

1.) The repair escrow enabled us to avoid making the repairs and upgrades on behalf of somebody else. Having done this before, I’ve learned that the buyer always has a different set of expectations when it comes to any type of repair or renovation work. Inevitably, you end up in a squabble about the workmanship or the scope of what was expected. By giving them an escrow account specifically designated for repairs, you put the buyer in control of getting the work done and don’t have to hassle with possible misunderstandings.

2.) Creating a repair escrow also protects us from spending money on repairs before the property closes. Interestingly, I had a prior contract on this same property and the previous buyers demanded that we do similar repair work on the house prior to closing. They were unwilling to set up a repair escrow or put up non-refundable earnest money … so I told them to take a hike. I refuse to spend dollars on a property without some level of protection that I won't get stuck with the repair bill and no closing.

3.) Using an escrow account is a great way to help the buyers avoid coming out of pocket for repairs. You may ask why we didn’t just lower our price by $7,500 and be done with it. That would be fine by me, but it doesn’t really help the borrowers. As a borrower, wouldn’t you rather roll $7,500 worth of repairs into your loan rather than come out of pocket for this money after the closing? Using the repair escrow is a great way to help your buyers get the repairs they want now without having to come out of pocket to get them.

I suppose many sellers don't know better, and simply make repairs for potential buyers without any protections in place. This may work out some of the time, but I've seen more than my fair share of loans fall through and know first hand how easy it is to watch a deal fall apart. In the end, using a repair escrow to take care of needed fixes and renovation is a win win scenario for both the buyer and the seller.

Photo: Dean Shareski

Ken Corsini is a seasoned real estate investor and business owner based in Woodstock, Georgia. Ken is best known for his role on HGTV’s hit show “Flip or Flop Atlanta,” and has flipped over 800 hou...
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    Replied over 7 years ago
    I like that idea, thanks for the insight.
    Jim Pratt
    Replied over 7 years ago
    Excellent, why open up a can of worms. From past experience, one learns when rehabbing/renovating you can find more surprises than you bargain for in repairs. Doing it your way can save a ton of money and a lot of stress.
    Thai Foo
    Replied over 7 years ago
    Very good advice, thanks!
    Tracey Holtzclaw
    Replied over 7 years ago
    Awesome info! Just keep in mind this will work for and conventional loans. FHA, VA or USDA which make up most or our buyer’s loans won’t go for this. Keep up the great posts!
    Tracey Holtzclaw
    Replied over 7 years ago
    Awesome info! Just keep in mind this will work for and conventional loans. FHA, VA or USDA which make up most or our buyer’s loans won’t go for this. Keep up the great posts!
    Replied over 7 years ago
    This came up in a recent transaction but the bank had a limited tolerance for the amount and we were advised that anything remotely considered structural would negatively impact the deal. The seller lowered the price. (They also would have wanted 1.5 times the repair estimate in escrow). It is probably a great tool for some other situations like yours though..
    Roy N
    Replied over 7 years ago
    Ken, We’ve implemented escrow as the buyer – essentially the same idea, but with the buyer driving the bus. In our particular case we designated a percentage of the purchase proceeds to be held in escrow while the vendor carried out remediation following a Phase II EA (if the vendor didn’t remediate then we would use the funds to carry out remediation before close). In the end, the Vendor backed out – he wanted the money, but wouldn’t take ownership of the mess arising from out-of-service USTs.
    Sharon Vornholt
    Replied over 7 years ago
    Ken – That’s a great way to handle it. I love that you point out the “buyers expectations” and how they may differ from yours. This provides protection for both the buyer and the seller in a fair way. Sharon
    Sharon Hiebing
    Replied over 7 years ago
    Excellent tip, Ken! Many times the seller doesn’t have the money to do the work before close anyway, so this helps everyone!
    Amie D.
    Replied about 7 years ago
    Great information, good tip, thanks!
    Mike McGuire
    Replied about 7 years ago
    This would be a perfect solution for me on a deal right now, but apparently the banks are not playing ball.
    Daniel Ryu Investor from Irvine, CA
    Replied over 5 years ago
    Hi Ken.. Great post. I was researching “Repair Escrow Accounts” and your article came up and I’m glad I read it. I have a question for Ken or anyone else on this thread: I’m trying to get a flip done using investors (or being an investor). Here’s a post I wrote about on BP – If an investors finances the flip repairs, I’ve heard others suggest setting up a Repair Escrow account that the investor can deposit money into. I’m wondering – if that’s set up with the title company and the investor deposits money in that account – does the investor have any ‘oversight’ or say in how that money gets spent? In other words, what protection does setting up a repair escrow account give an investor when it comes to flipping? And if you set up a repair escrow account, can it be stipulated that the amount deposited is collateralized against the property? Finally, how much does that cost? (ballpark) Thanks!
    Michelle Doyle
    Replied 4 months ago
    Thank you for this great read! As a new investor, this repair escrow strategy seems win win for both parties. This is the kind of stuff needed to build confidence when Im writing deals. Thank you!