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What Is An Escrow Holdback?

Tools on a work bench used to do home repairsWe recently had a deal on a cute condo with a loft area. The issue was there was no railing on the area of the loft adjacent to the stairwell, so the appraiser called it out as a health and safety hazard (someone could literally fall down the stairs). The underwriter of course called for a small railing to be installed prior to funding.

The seller wanted to get the property off his hands as quickly as possible and did not care to have any work done on the property. Our buyer was selected over multiple cash offers, which would not have required the work to be done.

In this instance, an escrow holdback would have been a perfect solution.

WHAT IS AN ESCROW HOLDBACK?

An escrow holdback occurs when escrow puts aside (or holds back) money during closing for repairs on a home. Once the repairs are done, the money is later refunded. Escrow holdbacks motivate both sellers and buyers to work together complete any necessary repairs because funds from both parties are held in escrow. In general, escrow holdbacks are only for the amount of the estimated repairs.

HOW DO ESCROW HOLDBACKS WORK?

Rather than delay the closing of the home for repairs, the lender my agree to an escrow holdback. In this case, the buyer could have obtained a bid for the work and posted the money in escrow at closing. Once the repairs are completed, the lender receives proof of the work completed and a new appraisal is ordered for the property.

Unfortunately, escrow holdbacks for repairs (even in such a common-sense situation as this) are still not allowed by many lenders. They are unwilling to take the risk that the work is not done, or not done properly, in which case they have unwarrantable collateral.

The only escrow holdback we can do is for sewer lateral repairs. The deposit of $4,500 (typically—the amount can vary) is posted in escrow according to the terms of the contract, and the deposit is sent to EBMUD or another government entity responsible for the sewer lateral compliance. That entity will then release the balance of the funds to the party who made the deposit (either the buyer or the seller) once the property is in compliance.

In the scenario above, a tactful agent was able to negotiate and arrange the work to be done with the seller, and we still ended up closing on time with all parties satisfied.

Jay Voorhees
Founder/Broker | JVM Lending
(855) 855-4491 | DRE# 1197176, NMLS# 310167