Home Buying in San Francisco>Question Details

angchu, Home Owner in San Francisco, CA

Escrow Holdback versus Prior to Closing

Asked by angchu, San Francisco, CA Sun Jun 10, 2012

We're purchasing a REO which needs to have french drains installed. The lender is talking about having the loan proceed with moving this activity to prior to closing versus escrow holdback. Which is better for us as a buyer?

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This answer all depends on your situation and the comfort level you have with this work getting done after the fact. The purpose of having the escrow holdback is to insure the work is completed. You should always make sure enough money is held back that will motivate the parties involved. See the web reference below for a complete explanation.
0 votes Thank Flag Link Mon Aug 24, 2015
Thank you all for your insightful responses and various perspectives. We decided to change lenders since these requirements were putting the purchase at risk. It looks better now and we are hoping to successfully close escrow at the end of this month.
0 votes Thank Flag Link Thu Jun 28, 2012

If you can, always get repairs completed before close of escrow but it is not always possible. In your case it may be hard to get the REO bank to pay for the repairs, but if they are paying why are they not doing thus beforehand.

Depending on your lender you may or may not be able to get them to keep to the "holdback". If this does not work talk to a lender who can see if you and the property could be financed through an FHA loan which allows for ceartain repairs after closing, it may cost you a little more but if the property is a good deal / and it is what you want and that you are prepared to deal with the liability of the repaitr and condition.

In the end, seek your Realtor' advice and talk to the broker if you are looking for extra opinions who know all the facts of your case.

Good luck,

0 votes Thank Flag Link Mon Jun 11, 2012
I wouldn’t allow a holdback unless it is a HUD owned property and part of the mortgage package.

Jim Simms
NMLS # 6395
Financing Kentucky One Home at a Time
0 votes Thank Flag Link Mon Jun 11, 2012
You may not have a choice if it's your lender's requirement. Your first step is to see if the REO seller is willing to do the work, although I think James may be right-- they could very well refuse. Your choices would then be to: 1. Find a new lender (although you may hit the same snag); 2. Walk away from the deal; 3. Pay to have the work done prior to close; 4. Pay $$ into escrow, which will be held after close and distributed to the tradesperson selected to do the work. Option 3 is the least palatable. Option 4 may not even be possible. Option 1 is by far the best choice. If you are using a loan broker and they are sophisticated, I think they may be able to find you a new lender.
0 votes Thank Flag Link Sun Jun 10, 2012
Anytime you have the seller do the work during escrow you give up being the client of the contractor and therefore the quality of the work can suffer. Also if the seller wants to do it they are likely looking at a cost savings.
I advise my clients to take the money after confirming the bid with an independent opinion.
Surprisingly there are ways to install a simple French-drain incorrectly. When I was doing this kind of work I saw many examples of drains that didn't have the pipe down far enough in the trench allowing water to still flow under the drain. I've seen materials used that weren't intended for the purpose and materials installed incorrectly i.e. not according to the manufacturer’s instructions.
0 votes Thank Flag Link Sun Jun 10, 2012
Jed Lane, Real Estate Pro in San Francisco, CA
Have the work done prior to you closing and get all the documentation stating as such.

0 votes Thank Flag Link Sun Jun 10, 2012
If I were in your position, I would have the french drain work completed before I took title to the property to be sure there is enough money to complete the necessary work.
0 votes Thank Flag Link Sun Jun 10, 2012
And REO means the house is lender owned. Are you dealing with the same lender on the purchase?

Generally, french drain work is expensive, time consuming. And, generally, the seller has a vested incentive to do the least expensive work possible.

I am afraid I cannot answer this question without knowing if you are getting your loan through the REO owner of the house.

Astrid Lacitis
Keynote Properties
415 860 0765
0 votes Thank Flag Link Sun Jun 10, 2012
If the REO lender is willing to have the drains installed prior to close, that's going to be your better and safer choice. Otherwise, with a holdback,if the work involves more than just the drains, and it often is, then you're stuck with the additional bill and the daunting, if not impossible, task of collecting funds from the seller. You can always request additional monies to cover this just in case.
0 votes Thank Flag Link Sun Jun 10, 2012
If you really want to buy the home a holdback and repair after close is the best for the buyer in my opinion. Under the senario that "At least you know that the repair is done" the lender has the option of not doing the repair and I have had one buyer lose a home because of a similar situation.

There was a pre-existing condition that the underwriter decided to make a pre-closing repair condition (my buyers were using a 203k to purchase the property) and the seller rejected the repair even with a bid and price increase to match the bid amount.
0 votes Thank Flag Link Sun Jun 10, 2012
Thanks for your response. Sorry, I re-read our loan officer's email. He's said that he's asking underwriting to allow the loan to proceed with moving the French drain prior to funding instead of escrow holdback (this was going to be the original request to the underwriter). The underwriter has noted that this requirement as prior to close. He indicates that "at least this gives you the assurance that the loan has been approved and that close cannot close until the item has been repaired." My impression is that an escrow holdback would have been a better option for us since we would have been able to close and receive funding (except for the portion that's being held back). Is that correct?
0 votes Thank Flag Link Sun Jun 10, 2012
On a REO property the lender may not want to install the French Drains as a preclosing condition. They normally will not allow you to work on the property prior to you owning it.

In my opinion moving the installation of the French Drains to a prior to close condition may kill the deal. You are also trying to reopen the contract for repairs on the property and that the selling lender may not like.

Just my opinion but ask your REALTOR® what they think.
0 votes Thank Flag Link Sun Jun 10, 2012
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