What is an escrow holdback?
October 19, 2014 14:40
Can Make or Break A Real Estate Transaction
Have you ever had a stressful situation where for one reason or another the seller could not complete required repairs prior to the close date?
Even if you have never had this actually kill a deal, chances are you have encountered this situation in some variation and it made for some very stressful last minute maneuvering and delayed closings.
An Escrow Holdback can save you these headaches and just might save your transaction one day.
An escrow holdback is when funds (typically on the seller side) are held at close until all required repairs are complete.
You might not have come across this before because the vast majority of lenders will not allow escrow holdbacks under any condition. The reason is that technically it’s a violation of Fannie/Freddie & FHA guidelines to close on a piece of collateral that is not complete. So understandably 99% of lenders will refuse to take on this risk; essentially closing a loan that is incomplete in the hopes the seller will finish required repairs before they package the loan. Bottom line, it represents a huge liability to the lender.
That being said, my company does allow escrow holdbacks in many situations and I’ve personally presided over transactions that would have ended in a sale fail if it were not for an escrow holdback. It’s not something to be taken lightly and every attempt should be made to complete repairs prior to close. However in the real world, sometimes that’s just not possible, and if the situation is right, we will approve an escrow holdback where most lenders would not even consider it.
Example: say you have a buyer transaction where the seller has agreed to decommission an oil tank. For one reason or another, the day of closing arrives and the oil tank decommissioning and documentation is still a week or more out. Also assume your buyer has given notice at their rental and will be homeless if the loan does not close in the next few days. Stressful right?! This is a situation in which you could use an escrow holdback to save the day for you AND your client.
Each escrow holdback needs to be approved on a case by case basis. That being said I can typically tell you very quickly if the situation you have would be eligible for an escrow holdback. Essentially what management is looking for is some type of assurance that repairs will be complete within two weeks or less after close and are not of a foundational/structural nature.
Of course it’s often not possible to switch lenders at the last moment to a lender that allows escrow holdbacks. If the issue is identified early enough you could do so or just work with a lender who allows escrow hold backs from the beginning. It might just be the difference between a successful closing and a sale fail.
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Here is a photo of a house that I just sold that involved an escrow holdback.
From a realtors perspective, escrow holdbacks can be a very valuable tool. In a recent transaction, we were under pressure from the seller to close on time, and a few delays occurred due to a VA appraisal. The VA appraiser wanted the seller to repaint the garage. It was spring in Portland, and we were in a rainy period, so we were not able to get the garage painted in a timely manner. Our only option to save the transaction was to do an escrow holdback.
The process went like this: The seller got a bid for repainting the garage and the bid was submitted to the VA and to escrow. We also wrote an addendum that spelled out the details of the holdback. The seller agreed to deposit 1.5 times the amount of the bid with the escrow company, and the contractor agreed to do the work within a few months. We thought we had fulfilled the VA requirements with this addendum and invoice from the contractor, but SURPRISE, the day before our closing date, the lender gave me a call and said that we needed to have a 2nd contractor bid.
I got on the phone, and I got a 2nd contractor to bid the job, so were good right? Well, not exactly; the underwriters informed us on the new, new closing date that they needed to holdback 1.5 times the amount of the larger of the two bids. The new bid was higher than the original bid, so the seller had to agree to an additional holdback of a few hundred dollars. Thankfully he agreed.
So the escrow holdback process is somewhat complicated by Veterans Administration requirements, but in this case. It save the deal. The buyers are elated and that is what really matters.