Ask Phyllis: a blog series of frequently asked real estate questions.
Buying a fixer
Dear Phyllis,
My niece and her husband are in escrow to purchase their dream home. It’s a 1920s Spanish home that, while charming, needs a lot of work. There are a variety of minor problems. Additionally, the chimney needs to be rebuilt, and the foundation requires cripple walls. After their down payment, my niece won’t have the money to make the repairs. Although the seller agrees that the repairs are necessary, they don’t have the funds to make the repairs. Both parties just don’t know how to make this work. I thought I would ask our local real estate expert for her advice.
Donna
Dear Donna,
Thank you for the compliment!
Years ago, when buying a fixer most lenders allowed withhold accounts. These accounts held a portion of the seller’s proceeds to be set aside during the escrow process for specific repairs that would be addressed after closing escrow. Withhold accounts acted as a financial cushion, giving the lender, buyers, and sellers peace of mind that necessary repairs could be addressed after closing.
Typically, a portion of the seller’s proceeds would be held back in escrow, and once the repairs were completed and work verified, those funds would be released directly to the contractors handling the job. To ensure coverage for potential unforeseen costs, lenders would often require the withhold amount to be around 1.5 times the estimated repair costs. Very few if any lenders allow this now.
In cases like your niece’s, if the lender does not allow a withhold account, a practical alternative exists. Rather than setting up a formal withhold account, the escrow company can be instructed to write checks from the seller’s proceeds to the vendors your niece wants to hire. This approach streamlines the process. After the work is completed, your niece and her husband can verify the quality of the work and pay the vendors accordingly. This method provides the flexibility to complete necessary repairs while ensuring the transaction moves forward without involving your niece’s lender.
