Once you finally go to
settlement it would be wonderful
that all the loose strings were
neatly tucked in and all the
checks were written to make all
parties happy. Unfortunately,
that's not always the case.
Especially when it comes to the
exchange of moneys between
buyers and sellers to wrap up a
transaction when walk-through
items have been identified and
must be remedied. The
walk-through by the buyer
usually takes place just before
settlement. Depending on your
market and whether or not the
sellers are out of the house,
the walk-through can happen a
few days before settlement, the
day of settlement, or in the
case of a rent-back by the
seller, several days, weeks or
months after settlement.
It is at this time that
the buyer accepts the final
condition of the property and
signs away his life for the
mortgage. If items are found not
to his liking, then let the
negotiations begin -- again.
Common items might be
something like stains in the
carpet hidden by rugs, dings in
the walls, electrical outlets or
light switches that don't work,
sinks dripping, commodes leaking
-- you name it. While these may
not be large items, if you add
up the expense of fixing a few
of them, you can be at a few
hundred dollars to haggle over
right at the last minute.
If you find you're in this
situation, you have three
options:
The seller can take
responsibility and fix the items
by having a vendor run over
there and take care of the
problems. This could also be
done by agreeing to a fix-up
amount of money and paying the
vendor up front;
Provide a credit at
settlement to the buyer (check
with the lender);
Put money in escrow whereby
the vendor bills the settlement
company and the funds are paid
out of that account (check with
lender).
It all sounds so simple,
doesn't it? And yet, lawsuits
have been launched over those
pesky walk-through items. With
number 2 and 3, for instance,
what do you do if the initial
fixing of the front porch light
uncovers a host of electrical
problems stemming from Mr.
Seller's
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home-improvement project a few
months earlier? Now, Mr. Buyer
wants a lot more than just the
money in escrow.
The problems with letting
a house exchange hands that is
not completely clean of defects
(at least at the time of
settlement) go on and on. If the
lender wants to sell the loan
after settlement, outstanding
repairs make it difficult, if
not impossible to sell it on the
secondary market.
Relocation companies won't
allow escrow money, period. They
want the transaction ended on
the day of settlement. In other
words, the settlement may be
postponed until the items are
fixed.
If you decide to leave
money in escrow, what will you
do if you've left too much? For
some reason, many buyers believe
that since you agreed to $500 to
repair and paint the wall in the
living room, that if the actual
bill comes up to only $300,
they're entitled to the
remaining 200 bucks.
Unless the buyer and
seller agree to the release of
the escrow funds, it customarily
cannot be released. Remember,
the settlement/escrow company is
the representative of the
transaction, not necessarily the
buyer or seller. They must
protect the escrow fund until
all parties agree or a court
orders the release of the money.
The best practice is to
simply not do escrow. Fix the
problem and finish the deal. If
you must, however, make sure the
seller and buyer draw up a very
detailed agreement that answers
at least these questions:
Who's holding the money?
Signed by the buyer, seller
and the escrow agent.
What's the money for? And,
what is the term of use (be very
detailed.)
How is the money to be
released (i.e., can it be
released upon the receipt of an
invoice from the vendor)?
If there's any balance, who
gets it and can it be released
immediately?
In essence, put everything
in writing and leave nothing up
to supposition
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