Repair Escrow Question

2 Replies

Hi All,

I don't know if I've ever posted on here. I'm an investor who is in the middle of my first hard money loan purchase. I was hoping I could use this process to buy 2 properties, but at the rate things are going, this is going to take a lot more of my available cash than I had anticipated... Anyway, here's my question:

Do all hard money loans require a repair escrow? I bought a property well below appraised value ($88K/$145K), but it needs some repairs ($13-14K). I already paid $5k down as a deposit, so the amount of the total loan without financing fees etc should be about $97K. Assuming $5-$6k in financing I was under the impression the hard money loan would include funds for the repairs and I wouldn't have to come out of pocket too much as long as the price of the house and price of repairs doesn't exceed 75% of the market value of the home ($109K). Yet, for some reason, I had to bring a significant chunk of change to the closing for a repair escrow (holdback) $13,650. What I find most aggravating about this escrow is not only did I bring the money for the repairs to closing, but I had to pay a fee to make a draw from the escrow! I'm literally paying a fee to access my own money! 

I thought the whole point of hard money lending was to use other people's money for this sort of thing? 

Augustine - that is a good question and funny you should ask. I just started posting on this site very recently and have been lamenting the amount people act like a hard money loan, private loan or commercial loan is just going to allow them to close with no issues. Like there are no negative aspects (aside from rates/costs). 

You can't really paint the scenario with one brush - lots of transactions are different. But when it comes down to any loan, start thinking like the creditor. If there are large issues - structural, safety issues with a home, you can pretty much bet a creditor is going to want to hold a repair escrow on top of everything. 

Think about it this way - your promise to pay your loan is pretty much worthless (exaggerating but slightly true). You could lose your job or worse. So ultimately, what matters the most to a creditor is that piece of collateral you are securing the loan with. What are the issues baring resale? What would a creditor need to do to a home before they had no issues selling it to a wide range of people? If the repairs needed greatly impact the marketability of the property, then you can bet the creditor would be asking for a repair escrow. 

Some properties certainly will not need this and there are plenty of hard money loans that will close without this. But they are very much so property specific and cannot be blanketed with a response otherwise. 

If I have serious reservations about my upcoming closing process to get out of the hard money loan, and suspect my lender is trying to rip me off, who would I go to? Would a real estate lawyer be the person to go through who can help figure out the financials? I'm really starting to regret this whole purchase.

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