Posted by Jeff Sadler
When you try to sell a house, you will usually have potential buyers negotiate for repairs and improvements that they expect to see done before they actually buy. Ordinarily, this wouldn’t be a problem — if they are serious buyers, you do owe them a few requests.
These days, though, it isn’t enough to find serious buyers. Banks and other mortgage lenders have been growing extremely risk-shy. In many states, 1 out of 3 qualified applicants are turned down for minor technical reasons at some point through the process. While this can be difficult for buyers, sellers get caught up in it, too. If the seller performs the repairs needed in the expectation that the buyer will qualify for financing, he might suddenly find that he doesn’t. When the next serious buyer comes around, he may require an entirely different set of repairs.
You can run through tens of thousands’ worth of repairs before ending up with someone who actually buys. What do you do then?
If Aladdin had used an escrow…
Since there’s no guarantee that a potential buyer will succeed in obtaining financing approval, it could be an idea for the seller to not actually perform the repairs asked for. Instead, he could simply offer to pay for the buyer to get them done once the sale goes through. Of course, the buyer could worry about whether the seller will actually come through with the money promised. This is what escrows are for, though.
Homebuyers and sellers already use escrow services to see their home deals through. With large sums of money and valuable property exchanging hands, they have the classic Aladdin problem — neither party wants to go first. If the buyer hands the money over first, he can never be sure that the seller will actually make the deed over to him afterwards. If the seller makes the deed over first, he can never be sure that the buyer will actually come up with the money.
The problem is easily solved with a third-party service called an escrow. This is a reliable independent medium that buyers and sellers work through. The buyer gives the money over to the escrow to hand to the seller once the deed is made over. Once the seller makes the deed over, he gives it to the escrow to scrutinize, who then hands the money over.
A repair escrow works similarly. The seller hands the escrow the agreed-upon sum for the repairs requested. If the sale of the home goes through as planned, the escrow hands the repair money over to the buyer to perform the repairs himself.
Wouldn’t it be easier for the seller to simply lower the price of the house by the cost of the repairs?
If the repairs requested cost $10,000, you could simply shave that sum off the asking price. While this might seem like a good alternative to the cumbersome escrow process, it doesn’t work out well for the buyer.
Buyers look to the mortgage lender to finance their home — $10,000 off the tens of thousands that such a loan involves doesn’t make a difference to them right then. It’s just something the bank deals with. When it’s time to make the repairs after the sale goes through, buyers will need to come up with the money. That could be difficult for them. Money in hand would be much more convenient.
An escrow is the perfect solution then. Some buyers balk at the added chore of setting up an escrow and demand that you do the repairs upfront. It’s simply not wise to accept such a demand.