Could a Repair Escrow Save Your Home Sale?

When you buy a house, you will typically need to make sure you have an inspection so you can identify issues with the property before it becomes yours. If you are getting a mortgage loan, the lender will likely also appraise the property -- and the appraiser may identify problems that can affect the home's market value.

Sometimes, an inspection or an appraisal will find problems. For example, you may discover that there's an issue with the driveway or deck, or that the sprinkler system in the home doesn't work. This could make you wary of buying the property unless the issue is fixed, or it could cause your mortgage lender to say it won't issue a loan until the problem is solved.

Ideally, you'll be able to negotiate a deal with the seller to make those repairs to the property. But there are times when that won't work because the seller can't afford to do so, or because you need to close quickly, leaving no time for repairs to be completed. Or the lender may want to ensure that the repairs are made before agreeing to give you a loan and the seller won't allow the fixes before closing.

In these circumstances, you could have a big problem that could derail the home sale. The good news is that a repair escrow or escrow holdback could save the day. Here's how this works.

What is an escrow holdback or a repair escrow?

An escrow holdback occurs when some funds are not released at a home closing. Usually, when the buyer pays the price of the home (or gets a mortgage loan to cover the purchase), all the money is distributed to the sellers (or their mortgage lender) and to the county or homeowners association to cover transfer costs.

When you use a repair escrow or escrow holdback, though, some of the money changing hands is not disbursed. Instead, money is kept in an escrow account held by a third party to be used to pay for the necessary repairs to the property. This will be money earmarked specifically for the repairs that need to be made. Usually, you'll need to hold back around 120% of the amount that the repairs will cost, just in case they end up costing more than expected.

You'll need to change your original real estate contract to provide details on the funds to be held back -- including whether the money will come out of the seller's profits or whether the buyer will put extra money into the account to fund the repairs. You'll also need to specify exactly what repairs will be done on the home and the timeline for completing them.

This money then stays in the escrow account, you can close on the home, and the money will be paid out for the repairs once they are completed to everyone's satisfaction.

Be sure you write a clear agreement and document everything

If you or your lender determine a repair holdback is necessary due to an issue with the property, you'll want to be sure to get everything in writing and document every detail about the money to go into this account. Check with your lender to find out the specifics, and consider speaking with a real estate lawyer to help you draft the contract amendment to best protect your interests.

Escrow holdbacks or repair holdbacks could save a home sale, but whether you are the buyer or the seller, you'll always want to be sure your rights are protected and that you understand the details before you agree to this arrangement.