Several FSBOs (individuals who are selling their own houses) are aware of the conventional use of escrow. In this article, we look at different ways to use escrow to resolve issues.

Escrow

Escrow refers to different things in different parts of the country.  In California for example, it’s part and parcel of the settlement process. While there’s no formal escrow before settlement in Virginia, the settlement agent collects title info, draws or has a deed drawn, organizes with the lender, accepts various assessment reports and in overall conducts an informal escrow in the days before settlement. The difference is that, in Virginia, usually documents aren’t signed by the parties until they meet at the settlement table.  It’s the use of escrow after this period that we’re concerned with here.

An Issue Rears Its Head

What’s possible differs from state to state, however making an escrow account (usually held by the settlement agent) after a home is sold can resolve issues. What types of issues? Let’s look at a few.

Firstly, let’s assume the buyer or seller wants, or needs, to resolve by a certain date. Lots of things can cause this including the date school starts, the date a breadwinner starts a new job or the date of settlement on the seller’s new home.

 Now, let’s assume an issue arises, which would stop that settlement time limit from being met.  Such issue might be caused by finding termites and termite damage, the discovery of intrusion on a utility right of way by a garden shed on the property being sold or the finding of high levels of radon gas within the home. 

Let’s further assume that the buyer and seller have settled on the basic solution of the issue. In the above examples, typical solutions might be that the seller will have the home treated for termites and have a licensed contractor repair the damage. Or the seller will have a contractor move the shed out of the right of way. Or the seller will install a radon mitigation system.  Of course, everything is negotiable, and a buyer who wants a property badly enough could agree to fix the defects himself.

What if the pest control company, contractor or the radon mitigation company can’t finish their work until after the planned settlement date?  What happens then?  Most frequently, settlement is delayed until these sorts of things are taken care of, but sometimes that isn’t desirable.  Sometimes delay of settlement can be a deal killer.

Problem Solving 101

Enter the “after settlement escrow.” The parties agree that an amount of money (usually a bit larger than the estimate) is kept aside in escrow awaiting completion of the work. The escrow agent has clear (normally written) guidelines about what must be completed before the money is released to the individual who put it up (or before the work is paid for and any excess returned to the person who put it up).

 The funding of an after settlement escrow usually comes from the proceeds of the sale, so it can be used where there are no funds to take corrective action any other way. Not minding if the person in charge could get a loan for the purpose, the procedure could take too long to meet the settlement time limit. In that way, it can be a “cash flow” solution, too.

 No matter what problem you encounter, it’s usually possible for a willing seller and a willing buyer to work things out. Remember that all sorts of needs can be accommodated without anyone’s being a loser.  Situations in which both buyer and seller are winners happen frequently. With any luck, that’s what will happen in your case. It just takes creativity and persistence.