BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Payments Outside of Escrow – Don’t Do It
Q: I am a listing agent. During the final walk-through for verification of the property condition just two days prior to the close of escrow, the buyer discovered mold on a wall in the storage room. The mold had not been identified before because it was covered by seller’s personal items. With seller’s permission, buyer had an inspector return to the property and he determined it would cost about $3,000 to remediate the mold since it was in the sheetrock, insulation and wooden framing. There is no time to complete the work and buyer and her agent are concerned; if the buyer’s lender finds out about the mold, there will be a delay in closing because the lender will likely require the work to be completed and a new Closing Disclosure likely would have to be issued.
The buyer’s agent has suggested that the seller just pay the buyer $3,000 outside of escrow by a check at the closing so as to keep the escrow on track. I am not comfortable with that. What should I do here?
A: You are right not to want to participate in a payment outside of escrow. Clearly, this is an attempt to avoid informing buyer’s lender of the condition of the property so that there will be no delay in funding and closing.
There are two things that are true:
1. A buyer’s lender is entitled to know ALL THE FACTS.
2. There is a formula: Lender + Outside of Escrow = Fraud
PRACTICE TIPS:
1. Do not participate in a scheme to arrange for a payment or credit outside of escrow to a buyer, or otherwise conceal the condition of the property from the lender. All payments and credits to a buyer must be approved by the lender — that means the underwriter for the lender actually making the loan – NOT the loan broker.
2. Many loan brokers will advise the agents to just do the payment outside of escrow, but if that happens, ask the loan broker to put in writing that that is okay. They won’t do so because they know it is wrong – they just want the loan closed.
3. When faced with such a situation, immediately discuss it with your manager to try to work out a solution.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. DO NOT FORWARD TO CLIENTS OR THIRD PARTIES. This Weekly Practice Tip is attorney-client-privileged and for the exclusive use of Broker Risk Management’s clients and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.