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I have made a few comments on property tribes about using escrow accounts and have been asked to post up some details.......so here you are. Hope it's useful.
One of the greatest diseases of the property investment sector is suppliers taking investor’s money and then disappearing without delivering - be that property sourcers who failed to source, project managers who failed to manage, or, most commonly, builders who failed to build. To my mind there is no reason for investor’s money ever to be at risk…… in our firm we have added the answer for our investors - using an independent escrow account. Other investors should think about using the same.
An escrow account is a financial arrangement where an independent third party holds and regulates the payment of the payers funds to the payee, for example from Investor to his/her Sourcing Agent or Main Contractor, during a project.
The investors funds are held 'In Escrow' (in our case in a separate, ring-fenced, insurance backed bank account) until whatever agreed work stage or transaction has been satisfactorily completed, and then when both Payer and Payee agree, and the money can be safely transferred.
These systems drive security, protection and structure for all parties involved. Transactions are carried out without the risk of an investor losing money, which often happens where they pay in advance, and then the services or works are not carried out to the required spec, or even at all, for example a sourcer was paid in advance and a property was never sourced, or worst of all the supplier has "gone bust" or "run off to Spain". There was so many examples of these situations on Property Tribes and elsewhere sadly.
However, investors can be at fault too, i.e. by not paying their suppliers, which is of course a large part of the reason suppliers seek advance payments - they don't want to have to chase you, the investor, after delivering good work - so when funds are in escrow the Sourcing Agent/Main Contractor has visibility of getting paid for their work, giving them the comfort to proceed with the work on their end.
There are various escrow providers out there and they will charge a range of fees for processing transactions, but if the fees are right then I for one would certainly pay a small percentage to have protection over my money. How many people on here would, in hindsight, have liked have forgone a small percentage to have protected the deposit they paid to their builder before he ran off with their money?
We frankly got sick of hearing these stories from disappointed investors, so decided to use tech to fix the issue.For our own investors we have an integrated service once they have selected an investment property that they like the look of - they then use escrows on a simple dashboard - so, escrow your sourcer fee until purchase completion for a start, then perhaps set up stage payments with your builder and pay the builder at the completion of each stage - but, for example, after receiving uploaded evidence on the system, like of pictures or videos of your completed job, or evidence that your builder has actually paid for your fancy kitchen..... before you pay him for it, and before he goes bust and the kitchen supplier comes to take his kitchen back from you - we have seen all this nonsense.
So we would say STOP GETTING ROBBED. Where you can, ESCROW.
PS Someone elsewhere already commented to me along the lines of "we have this covered, we have a client money account" - this is NOT the same thing. Once you have sent your money to the supplier, even if its in their client money account, they then control your money and you are then are reliant on the supplier to send it back if needed.
Escrow are fairly standard as the projects get larger and more commercial. It is definitely a good idea to use for smaller projects and so I hope your solution takes off. One question you can help clarify for everyone with your solution is what are the withdrawal/payment criteria. How is it decided that something should be paid. This is usually where things fall down.
Chartered Accountant, Tax Advisor and Mortgage broker
(and BTL portfolio owner)
Thanks for the comment - its down to the investor and supplier to agree that the works are complete and to upload any required evidence. If both parties don't agree then no money is transferred - the power is in the investor hands and they have to approve the release of funds. If they simply cannot agree then we will act as independent arbitrator in the first instance but only relating to payment of sums held in the escrow account - we are not an experts in construction for example, but will, where able to do so, make a recommendation to the parties involved based on what we can see and such recommendation is not binding on either party. We only release disputed escrow funds if both Payer and Payee agree with our recommendation.
In the event that our arbitration fails to bring about the agreement between the Payer and Payee then we recommend that both parties agree to submit to the recommendation of a RICS surveyor. If both parties agree, we recommend a RICS surveyor, whose appointment needs to be agreed to by both parties, to then inspect the disputed work. The RICS surveyor is paid in advance equally by both parties and the parties agree that the surveyor’s recommendations shall be binding on both parties. Then if either party then refuse the recommendations of the surveyor (despite having contractually agreed to be bound by such recommendation) then we would expect the only outcome will be legal action by the parties to bring about resolution and the monies will stay in escrow until we are directed by a court.