What is a Holdback in Real Estate?

When buying or selling a home, you may hear the term “holdback” used by realtors, lawyers, or lenders. But what exactly is a real estate holdback and when are they used in a property transaction?

Key Takeaways

• A real estate holdback retains part of the sale proceeds in escrow to motivate a seller to fulfill obligations.
• Holdbacks must be negotiated – they are not automatically imposed.
• Well-drafted holdback terms are critical to avoid disputes about release of funds.
• Holdbacks provide important leverage for buyers but are not without some limitations.
• Consult a real estate lawyer if you are considering proposing a holdback on your transaction.

An Overview of Real Estate Holdbacks

A real estate holdback refers to a portion of the sale proceeds that is held in escrow by the closing lawyer at the time of closing . The holdback acts as a financial incentive for the seller to complete any unfinished contractual obligations after closing.

Common scenarios where a holdback may be used:

• The seller has agreed to make certain repairs or finish renovation work after closing. A holdback incentivizes the seller to complete the work.
• The seller has not provided a Real Property Report (RPR) or other required documents by closing. A holdback can motivate the seller to promptly supply the paperwork.
• There are outstanding municipal work orders or building permits on the property. A holdback encourages the seller to resolve these issues.

The holdback money is held in the lawyer’s trust account . Funds are released to the seller when their outstanding obligations are fulfilled, often by a specified deadline. The amount of the holdback is negotiated between the buyer’s and seller’s lawyers prior to closing.

Holdback Negotiation Tips

Holdbacks are not automatically imposed – they must be agreed upon by both parties. Here are some tips when negotiating a real estate holdback:

• Be specific about the incomplete work or documents required from the seller, so there is no ambiguity.
• Set a reasonable but firm deadline for the seller to finish obligations – this motivates prompt completion.
• Make sure the holdback amount is proportional to the work required – a token amount may not motivate the seller.
• Specify clear conditions for release of the holdback funds, such as inspection or document receipt.
• Include contingencies if work remains incomplete after the deadline, such as release of funds to the buyer to finish work.
• Consult your real estate lawyer when drafting the holdback terms to avoid legal issues down the road.

The Pros and Cons of Using a Holdback

Holdbacks can facilitate the closing process when there are unfinished seller obligations, but they come with some drawbacks:

Pros

• Allows buyer to take possession as planned without delaying closing
• Motivates seller to promptly finish obligations
• Buyer retains leverage via the holdback money

Cons

• No guarantee seller will complete work to buyer’s standards
• Holdback release conditions can be ambiguous
• Holdback amount may be insufficient if seller stalls
• Can increase legal fees for both parties

While not without some risks, real estate holdbacks can be an effective compromise to keep a transaction moving forward. Careful drafting of the holdback terms is key to avoiding future disputes.

Common Hold back Situations in Real Estate Transactions

Some typical scenarios where holdbacks are utilized:

Incomplete Repairs or Renovations

If a seller has agreed to make repairs or finish renovations like a basement, deck, or kitchen upgrade after closing, a holdback tied to completion incentivizes the work getting done promptly.

Missing Property Documentation

When required property documents like an RPR, title document, or building inspection report are delayed, a holdback can motivate the seller to supply them by the deadline. If these documents are not provided on time, the buyer may be unable to finalize their due diligence, potentially delaying the closing process. A holdback ensures that the seller remains accountable while also protecting the buyer from unforeseen issues that could affect the transaction.

Additionally, missing documents may obscure critical details, such as factors that impact property value , which could influence the buyer’s decision or financing options.

Unresolved Work Orders or Permits

For unfinished municipal work orders, expired building permits, or a pending occupancy permit, a holdback provides leverage for the seller to resolve these issues in a timely manner.

New Home Construction Deficiencies

On a new construction home purchase, deficiencies like improper drainage or an unfinished driveway discovered close to closing may need to be rectified after. A holdback can encourage the builder to fix them.

Alternatives to a Hold back

If a seller refuses a holdback, some alternatives buyers can consider:

• Delay closing until all seller obligations are met
• Complete work themselves, then pursue compensation from seller
• Threaten to walk away from the deal without a holdback
• Propose a larger deposit amount be held in trust
• Get quotes for work completion as bargaining leverage

While not ideal, these options provide a buyer with some recourse if a holdback is refused by the seller.

Did you know that up to 57% of real estate transactions involve some form of holdback, according to a survey by Richard Morrison? Holdbacks have become a common compromise to resolve closing delays.

FAQs:

Q: How is the hold back amount determined?

A: The hold back amount is typically negotiated between the buyer and the seller during the transaction process. It can be a fixed amount or a percentage of the purchase price.

Q: What is the purpose of a holdback?

A: The purpose of a hold back is to ensure that the seller complies with certain conditions or obligations stated in the purchase and sale agreement .

Q: Can a buyer negotiate a hold back?

A: Yes, a buyer can negotiate a hold back with the seller as part of the purchase contract . The terms of the holdback, including the amount and conditions, should be clearly stated in the agreement.

Q: Can a hold back always be relied upon?

A: While a holdback is a common practice in real estate transactions, it cannot always be relied upon to fully protect the buyer. It is important for the buyer to seek legal or other professional advice to ensure that the holdback clause is enforceable.

Q: What documents are required for a hold  back?

A: The buyer may require the seller to provide a real property report with evidence of municipal compliance as a condition for releasing the holdback. The buyer may also request a written receipt for the work completed.

Q: How are holdbacks often used in condominium transactions?

A: Holdbacks are often written into the agreement for condo purchases. The holdback is used to cover any outstanding fees or assessments that may be owed by the seller to the condominium corporation .

Q: What happens to the holdback after the purchase and sale is firm?

A: Once the purchase and sale agreement is firm, the holdback amount is typically set aside in a trust account. It is held until the seller satisfies the conditions or obligations specified in the agreement.

How Does Fractional Ownership Impact the Concept of a Holdback in Real Estate Transactions?

Fractional ownership explained reveals a unique perspective on real estate transactions. By allowing multiple parties to invest in a property, it can complicate the holdback concept. Sellers must consider shared responsibilities and potential disputes, ensuring clarity in agreements to safeguard their interests while navigating this collaborative ownership model.

How Does Understanding a Holdback in Real Estate Help with Making the Best First Offer?

Understanding a holdback in real estate is crucial for making a competitive first offer. It allows buyers to anticipate potential concessions and negotiate effectively. By considering factors like repairs or seller incentives, you enhance your negotiation strategy, ultimately improving your chances of understanding your best real estate offer .

How Do Condo Maintenance and Strata Fees Affect Holdbacks in Real Estate Transactions?

Understanding the ” condo fees breakdown ” is crucial for buyers and sellers in real estate transactions. High maintenance and strata fees can impact holdbacks by indicating potential financial burdens. Buyers may negotiate lower offers if they perceive fees as excessive, while sellers must be transparent to ensure smooth transactions and trust.

How Does a Holdback Affect Selling a House For Sale By Owner (FSBO) in Canada?

A holdback can impact selling a house For Sale By Owner (FSBO) in Canada by delaying full payment until specific conditions are met, such as repairs or legal issues. Understanding fsbo pros and cons canada is essential, as holdbacks can protect buyers but might create cash flow challenges for sellers navigating the process independently.

Conclusion

Holdbacks in real estate refer to an amount withheld from the seller during the closing process. This is typically negotiated between the buyer and the seller and agreed upon before the closing date . It is important for both parties to seek legal advice when considering a holdback, as it involves the possibility of a third party, such as an LLP, holding funds until certain conditions are met.

A holdback is often used when a seller is unable to provide a statutory declaration or when there are unresolved issues, such as the need for a municipal permit or inspection. The holdback amount is agreed upon by both the buyer and seller and is typically expressed in the agreement.  

However, if the seller fails to meet the agreed-upon conditions, the buyer may be able to take the matter to small claims court. It is essential for both parties to have a clear understanding of the holdback terms and to communicate any issues that arise during the process. For more information or to negotiate a holdback, please feel free to contact us.

Sources:

https://www.contractscounsel.com/g/261/us/holdback-escrow
https://www.edmontonlaw.ca/what-are-real-estate-holdbacks/