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Another Real Estate Problem - Escrow
Old 12-28-2016, 05:58 PM   #1
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Another Real Estate Problem - Escrow

I finally, finally sold my house. Unfortunately it failed the septic inspection and that has to be fixed first or money put in escrow at closing to fix it, per county law. I got a permit and estimates from contractors and submitted this to the title company for a closing escrow. The title insurance company insists that the escrow be 1.5X the estimated cost. This comes to about $35K.

My concern is that I'll never see a dime back from the $35K, because it will be all too easy between the buyer and the contractor to stretch the cost to fit the money all ready earmarked.

How would you approach this? I have consulted an attorney but I'm waiting to see what he suggests.

Edited to add: closing in 9 days, no time to complete the job before then.
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Old 12-28-2016, 06:09 PM   #2
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If the contractor can get to the job immediately, have him get on it. Most such jobs can be done in a day or two.

The just put the closing off a few days.

I wonder what others have spent on septic systems when building a home? Sounds pretty expensive to me. But again, the last septic system I installed was 1979.
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Old 12-28-2016, 06:09 PM   #3
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You could hire one of the contractors to fix it. Of course, that would delay the closing date, but at least your money would not be tied up in escrow.
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Old 12-28-2016, 06:15 PM   #4
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If the contractor can get to the job immediately, have him get on it. Most such jobs can be done in a day or two.

The just put the closing off a few days.

I wonder what others have spent on septic systems when building a home? Sounds pretty expensive to me. But again, the last septic system I installed was 1979.
It has taken me almost a month to get contractors out for estimates - there is no way that the job will be done in the 9 days before we close. Special materials need to be ordered, trees need to be removed, the contractor needs to fit it into his schedule and it is winter here, so not every day is a work day especially when digging.

The county sets the specifications for the system and this one is gold plated, per the contractors who do systems in other counties where the design is left up to the installer.
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Old 12-28-2016, 06:15 PM   #5
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You could hire one of the contractors to fix it. Of course, that would delay the closing date, but at least your money would not be tied up in escrow.
Right, but not a practical option at this point.
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Old 12-28-2016, 06:20 PM   #6
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Unless you need the funds to close on another property, I would not close until the work is done. It's the only way the work will get done under your supervision. I'm surprised the lender would allow the sale to close without the septic repaies being made.
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Old 12-28-2016, 06:34 PM   #7
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Unless you need the funds to close on another property, I would not close until the work is done. It's the only way the work will get done under your supervision. I'm surprised the lender would allow the sale to close without the septic repairs being made.
Delaying closing could kill the deal, as interest rates have risen since the buyer locked in his loan.
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Old 12-28-2016, 06:43 PM   #8
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Unless you have another buyer, you have backed yourself into a corner. Either accept that you may lose $12k+/- or push to get the work done before the buyer's loan lock expires.
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Old 12-28-2016, 07:01 PM   #9
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Unless you have another buyer, you have backed yourself into a corner. Either accept that you may lose $12k+/- or push to get the work done before the buyer's loan lock expires.
Thanks, very helpful. Even the real estate agent did not know about the 1.5X escrow requirement from the title insurance company and he has been an agent for 20+ years.
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Put what you want in writing
Old 12-28-2016, 07:03 PM   #10
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Put what you want in writing

Tough to answer without seeing your contract or the applicable state law, but the simplest and most obvious answer is to add an addendum to the deal which states exactly what you want and expect. For example, something that states you will control who is hired to do the work and for how much money. Should you challenge the final outcome in the future you will be much better off if you have a document which clearly shows a meeting of the minds as to how the process was to have worked. As long as your terms are not unreasonable, the other parties should agree in order to keep the deal moving. Good luck.
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Old 12-28-2016, 07:09 PM   #11
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Tough to answer without seeing your contract or the applicable state law, but the simplest and most obvious answer is to add an addendum to the deal which states exactly what you want and expect. For example, something that states you will control who is hired to do the work and for how much money. Should you challenge the final outcome in the future you will be much better off if you have a document which clearly shows a meeting of the minds as to how the process was to have worked. As long as your terms are not unreasonable, the other parties should agree in order to keep the deal moving. Good luck.
This is sort of what the title insurance agent suggested, but I'm struggling to know exactly how it would be worded and structured.
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Old 12-28-2016, 07:22 PM   #12
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The best language is plain, simple, and clear. Your attorney should be able to tweak it to cover all the bases, but think about how a judge or jury (people like you) would react to it as evidence in a future court case. Whatever you write is an attempt to show what you and the other party intended to happen. There should only be one reasonable interpretation when you are done.
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Old 12-28-2016, 07:44 PM   #13
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In particular, all expenses over the agreed-upon estimate will be the responsibility of the buyer. Some buyers may balk, but it's always worth a try.
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Old 12-28-2016, 08:32 PM   #14
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I don't see where it is the title company's role to be able to insist on anything... if the buyer and seller agree to something then their role is to administer what you agreed.

Are any of the contractors willing to do it for a fixed price? If you have a permit then I presume you also have a septic design that the permit was based on.

What about that you pay the first $25k and anything cost above that is split 50/50? That would provide an small buffer for a poor estimate but also incentive for the buyer not to go crazy since he is sharing in any overruns.
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Old 12-28-2016, 09:11 PM   #15
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The title co will be responsible for a clear title (legally) at close. If the job goes over it's their dime.
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Old 12-28-2016, 09:18 PM   #16
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You must be so ready to move on, TO. Hope it works out that the real septic costs are paid and you get back part of the escrow (this "fix things after closing from escrow" can't be that uncommon so hopefully someone knows how to set it up), but if not, I hope losing the extra $12k (if the escrow is 1.5 the estimated cost) won't affect your future happiness.
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Old 12-28-2016, 09:37 PM   #17
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Do you really think that the buyer and the contractor will conspire to screw you?

Do you really want to sell and be gone?

You can do what needs to be done to close the deal (I'm sure that "time is of the essence" is in the contract) or you can just get it done as time allows.

Good luck!
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Old 12-28-2016, 10:59 PM   #18
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In particular, all expenses over the agreed-upon estimate will be the responsibility of the buyer. Some buyers may balk, but it's always worth a try.
If I were the buyer, I would then want to be part of the process of getting the estimate. I'd want assurance it's a good faith estimate from a highly qualified contractor and includes some money to cover possible unforeseen issues. Otherwise, I'd have to assume the repairs were going to cost me some money (estimates are seldom met) and still be comfortable that I'mstill getting an acceptable deal on the house.
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Old 12-28-2016, 11:24 PM   #19
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My concern is that I'll never see a dime back from the $35K, because it will be all too easy between the buyer and the contractor to stretch the cost to fit the money all ready earmarked.
The only area I can see where the contractor and new owner might intentionally "spend" escrow money unnecessarily would be in final landscaping. The actual re-do of the septic system is outlined in county requirements and the permit they issued should spell out the details. When the work is done the county inspector will have to sign off that the new system meets specs. However, "unforeseen" problems and over-runs are laying out there to soak up money.

Is the extent of repair or re-establishment of existing landscaping clearly spelled out? For example, if a tree is taken down, does a new tree have to be planted? Does sod have to be laid? Etc.?

Do any of the estimates you got give a firm, delivered price where the contractor is responsible for any over-runs or unexpected issues? Your best hope to protect yourself would be to get a contractor who will contract with you to do the job at a fixed price, even if you have to offer more money than initial estimates. That is, offer to pay some extra to shift the risk to the contractor if unplanned difficulties arise.

If the estimates you have are for a time and material job with you (or the escrow fund) eating any over-runs, I can see why the escrow company wants you to leave 1.5X the estimate. You wouldn't really expect the contractor to come in under his estimate, would you? So, ask how much for a fixed, contracted price.

Counties seem to have adopted the policy that septic systems that do not meet current code will be brought up to date when the house changes hands and are taking it very seriously. A buddy in northern Wisconsin just had to pay big bux for a septic re-do to sell his summer home when the county required a mound system be installed. It amounted to about 20% of the selling price of the home.

If things go against you, would you be willing to have the entire $35k escrow lost to you rather than have to continue the selling process? Probably something you need to think about.

Good Luck!
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Old 12-29-2016, 02:04 AM   #20
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A few points:

1. Understand that this is not the Buyers problem. It is your problem. Either you have an old septic system/field or you did not properly take care of it. The Buyer is innocent and you must fix it whether you lose the Buyer or not. If you do not fix it, most state laws would require you to disclose the issue to any potential Buyer.

2. Hiring an attorney on this simple issue will burn $1,000-2,000 of the dollars you are hoping not to lose. Perhaps more.

3. Interest rates are rising and you are months away from the busy transaction season.

4. Balance how long it took to find this Buyer. If very quickly you have more to bargain with. If the house has been on the market for a while not so much.

5. Draft the addendum with plain and simple language. This is not magic. Provide a time period when the money shall be returned after you local health board approves the new system. I personally would not close until you at least have a firm written estimate (based on a site inspection) with start and completion dates that the Buyer agrees upon. Closing without such an estimate would be an unacceptable risk to me. It is very difficult to provide a general estimate on a septic system without knowing where the field will be etc....In other words, the estimate you have may not be worth anything. Understand whether you have merely an estimate or an agreement to complete the job at a fixed price based upon an analysis of the property.

6. Depending on your state, septic failure is not normally a title issue. Having said that, the title company wants enough in escrow to get the job done so that it is not in protracted litigation. I suspect any escrow agreement will hold you liable for the title companies legal fees.

Just my thoughts based on experience with no legal advice being given. Good luck.
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