2017 Master Insurance Tip of the year. How to avoid having your rehab funds locked up in an escrow account.
2017 Tip of the year: Escrow VS Bond
Hi, I’m Chris McDade, I’ve been an insurance agent since 2004 and today I’m going to share a little known, Home Investor Escrow Hack, call it the Master Insurance Tip of the year, about how you can avoid having your home renovation funds locked up in escrow
It is commonly known that Cities on the east side of Cleveland like; Cleveland Hts, Euclid, Highland Hills, Shaker Hts, Mayfield Hts, Warrensville Hts, University Hts, Bedford, Bedford Hts, Garfield Hts, Maple Hts, basically all the Hts, require escrow accounts to be established for major housing repairs prior to closing on a sale. This is true for all major exterior and interior items such as
Paint and all related carpentry repairs (house and garage)
Major porch and step repair
Downspouts to storm sewers
Replacement of deteriorated windows and/or doors
Concrete replacement or major repair
Dead tree removal
Major electrical repair (panel replacement, rewire of basement, etc.)
Major plumbing repair (replacement of stacks, fixtures, supply lines, etc.)
Heating, ventilation and cooling (HVAC)
Foundation – support post, block wall bowed or collapsed
Major breach of ceilings, walls or floors
If violations noted on a Point-of-Sale Inspection are not corrected before the transfer of title, an escrow account must be established from the buyer and funds must be deposited to pay for and correct the violations. Many loan programs will not allow you to work this escrow account money into your financing.
So, how is the Escrow Amount determined?
The dollar amount is calculated by the city, based on the average price of repairs, multiplied by 125% and some cities like Shaker Hts, Bedford, and Warrensville Hts may require up to 150% of the total cost of repairs.
So, for example: Say the average cost of a new roof for a Cleveland Heights home is $7,500. The escrow requirement, which is 125% of that cost, would be $9,375.
Add to that, the average cost to paint the exterior of a Cleveland Heights at $4,500. The escrow requirement for which would be $6,250.
Together, the total amount of money you would need to have locked up into an escrow account would be $15,625
Note: This is true even if your actual costs may turn out to be less than the calculated required amount. YOU STILL NEED THIS MONEY IN ESCROW
Now, there is an alternative to locking up your money in escrow; it’s called a performance Bond.
Depending on the structure of your deal, you may have the ability to purchase a one-time performance bond from your insurance agent which can satisfy your projects escrow requirement.
What this mean for you is, instead of having your $15,625 locked up in an escrow account for the duration of your project, you may purchase a performance bond which guarantees those funds to the city, and only costs you, the rehabber, a few hundred dollars.
Average costs for performance bonds are $25 – 35 per $1000, so for our rehab example your bond could cost a total of $390 – $546
Now, of course, as with most things in life, there are caveats to how all of this should be set up. It is important to coordinate with your contractor and an experienced licensed insurance agent who will help make sure all of the required paperwork is done right the first time.
Cleveland is a great city on the rise and one I am proud to call my home!
I’m Chris McDade, Your Insurance Consultant
I hope this information was helpful to you! If you have any questions or would like to discuss your individual circumstances, please contact me.