Escrowing Funds at Closing
Escrowing funds at closing is sometimes the only way to avoid a significant delay in completing the purchase.
This type of escrow is not the same as the account used in the normal course of the closing. This section refers to escrow accounts that are established to deal with problems that occur prior to or at the closing.
It is important to understand the specifics of each situation to insure that your interests are fully protected. This means understanding how an escrow account works and making sure that sufficient funds are escrowed. It is also essential to have supporting agreements and documentation that properly and completely protect your interests.
Funds are usually escrowed to address two different types of problems:
Many purchases are contingent upon the seller completing some type of repair or other work prior to the closing. Aditional problems are often discovered by the buyer's inspector.
If these items are not completed on time the closing may be delayed - causing considerable inconvenience to all parties.
An alternative to delaying the closing is to establish an escrow account to cover the cost of the repairs - which will be completed after the closing. Since the buyer is protected by the escrowed funds the sale can be completed on schedule.
The escrow arrangement should meet the following requirements:
- The funds should be adequate to cover the cost of the work under any reasonable circumstance - including an allowance for contingencies.
- The agreement should allow the escrow agent to release funds only after the buyer has approved the work.
- The buyer should have the right to replace any contractors that do not perform satisfactorily - even if the replacements are more expensive.
Always make sure you understand the scope and cost of the work involved before agreeing to an escrow arrangement.
If the seller is subject to judgments or other claims, the ability to pass clear title to the buyer may be jeopardized.
Typically, any existing claims are paid at the closing out of the purchase funds. However, sometimes a seller will dispute the validity of a claim and declare the intention have it legally removed.
Unfortunately, this type of action is often unfeasible within the time available before closing. Funds can be escrowed by the seller to protect the buyer and insure that there are no title problems.
In this situation, the escrow agreement should meet the following requirements:
- The amount deposited should be enough to cover the claim plus any foreseeable interest that may accrue. An additional amount should be added to cover contingencies.
- The buyer's lender and title company must accept the arrangement in writing. The title company must provide the title insurance and the lender must agree to fund the mortgage based on the escrow.
- The buyer must have the right to force payment of the claim from the escrow if the seller has not resolved the problem is a reasonable period.
Make sure you fully understand the situation before accepting this type of arrangement.
Talk to Your Attorney
If you aren't working with an attorney on the purchase you may want to avoid all but the simplest escrow arrangements - or delay things long enough to get a lawyer. The drafting of the agreement can be quite tricky - and you want to make sure that the money is not only deposited, but that it will be available to fund whatever has to be done to resolve the problem.