When it comes to real estate transactions, a holdback is an amount of money that is withheld from the seller at closing until certain conditions are met. Holdbacks can be a useful tool for protecting the buyer's interests, but they are not always necessary or even possible in every transaction.
Here's a closer look at why holdbacks are sometimes used and how they work:
Why use a holdback?
There are a few common reasons why a holdback might be used in a real estate transaction:
- To ensure that repairs are completed: If the home inspection revealed any issues with the property that the seller agreed to repair, the buyer may request a holdback to ensure that these repairs are completed. For example, let's say the home inspection revealed a problem with the roof. The seller agrees to fix the roof, but the buyer wants some assurance that the work will be done. In this case, the buyer might request a holdback of, say, $5,000. This money would be withheld from the seller by the buyer's lawyer at closing and released once the roof has been repaired to the buyer's satisfaction.
- To cover any outstanding liabilities: If there are any outstanding liabilities on the property, such as taxes or condo fees, the buyer may request a holdback to cover these costs. For example, let's say the seller owes $2,000 in condo fees on the property. The buyer doesn't want to be stuck paying these fees, so they request a holdback of $2,000 to cover the outstanding liability. The holdback would be released to the seller once the fees have been paid.
- To protect against undisclosed issues: In some cases, the buyer may request a holdback as a way to protect against any undisclosed issues with the property that may come to light after the agreement, but prior to closing. For example, let's say the seller became aware of a problem with the roof leaking during their final property visit. It's a leak that wasn't there when the property was first seen, nor was it there when it was inspected. The buyer might request a holdback to cover any necessary repairs that may be needed down the line.
How does a holdback work?
A holdback is typically negotiated between the buyer and seller or their lawyers as part of the purchase agreement. The parties will agree on the amount of the holdback and the specific conditions that must be met in order for the holdback to be released. The holdback is usually held in trust by the buyer's lawyer, until the agreed-upon conditions have been met. Once the conditions have been met, the holdback is released to the seller. It's important to note that a holdback is not the same as a deposit. A deposit is a sum of money that is paid by the buyer to show good faith and to secure the purchase of the property. A holdback, on the other hand, is an amount of money that is withheld from the seller at closing.
The bottom line
In summary, a holdback is a tool that can be used to protect the buyer's interests in a real estate transaction. It is an amount of money that is withheld from the seller at closing until certain conditions are met. Holdbacks are typically used to ensure that repairs are completed, to cover any outstanding liabilities, to protect against undisclosed issues, or to protect the buyer's interests in general. They are negotiated between the buyer and seller and are usually held in trust by the buyer's lawyer until agreed-upon conditions have