What are the pros and cons of using an escrow holdback for repairs?

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When you buy or sell a home, you may encounter some issues with the property condition that need to be resolved before closing. One way to deal with these issues is to use an escrow holdback, which is a portion of the seller's funds that is held in escrow until the repairs are completed. But is this a good option for you? Here are some pros and cons of using an escrow holdback for repairs.

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Consult your lender:

Before considering an escrow holdback, check with your mortgage lender. Many lenders no longer allow this for repairs, so confirming its possibility is a crucial first step.
Adjust the price:

Instead of an escrow holdback, you can negotiate a price adjustment to cover repair costs. This gives you immediate funds to manage repairs without the wait or escrow complexities.

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1 Pros of escrow holdback

An escrow holdback can benefit both buyers and sellers in some situations. For buyers, it can ensure that the repairs are done properly and in a timely manner, without having to pay out of pocket or wait for the seller to reimburse them. It can also avoid delays in closing or losing the deal altogether. For sellers, it can save them the hassle and cost of hiring contractors or doing the repairs themselves, especially if they have already moved out or have limited resources. It can also help them avoid legal disputes or claims from the buyers if the repairs are not satisfactory.

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Steve Maserow

Branch Leader at Barfoot and Thompson - Howick
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An escrow holdback can be a smart move for both buyers and sellers. For buyers, it provides peace of mind, ensuring repairs are completed as agreed. It also protects your investment and avoids potential delays. Sellers benefit by avoiding the hassle and cost of managing repairs, especially if they've already moved out. It can also prevent future disputes and claims.

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Rico Vertyl

Realtor | Entrepreneur | Leader
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Escrow holdbacks can provide a flexible solution during negotiations, allowing both parties to agree on a fair arrangement for handling necessary repairs without delaying the closing process.

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Cedric Crumbley

Helping veterans unlock VA Loans & buy homes in Houston | MBA | U.S. Army Veteran
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With an escrow holdback, you can control the process before releasing the funds. For buyers, it’s peace of mind. The money is set aside, and no one gets paid until the repairs are completed to your satisfaction. No more worrying about what happens after you get the keys. Buyers gain assurance that repairs are complete. Sellers can close without huge discounts. It’s a flexible way to bridge the gap and keep the deal moving forward. Exterior repairs delayed by seasonal conditions? No problem. An escrow holdback lets you close now and take care of those issues when the timing is right.

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2 Cons of escrow holdback

An escrow holdback can also pose some challenges and risks for both parties. For buyers, it can reduce their bargaining power or leverage in negotiating the price or other terms of the deal, since they are essentially accepting the property as is. It can also expose them to unforeseen problems or expenses if the repairs turn out to be more extensive or complicated than expected, or if the escrow agent or lender does not release the funds promptly or fully. For sellers, it can reduce their net proceeds or cash flow from the sale, since they have to leave a portion of their funds in escrow until the repairs are done. It can also create uncertainty or stress if the buyers are not satisfied with the repairs or if they try to renegotiate the deal.

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Jennifer Hoskins, B.A.Realtor

Luxury Listing Agent in Northern Virginia, Washington DC
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For buyers who have financing/lenders, most of if not all lenders no longer allow escrows for repairs. It is important to talk with your lender or have your agent talk to your lender to confirm whether escrows are allowed at settlemynor not for repairs.

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3 Alternatives to escrow holdback

An escrow holdback is not the only way to handle repair disputes in real estate transactions. Depending on the nature and extent of the issues, the parties may consider other options such as adjusting the price or offering a credit to the buyers to cover the cost of the repairs, providing a home warranty or insurance policy to the buyers to cover any future defects or damages, agreeing on a list of specific repairs that the seller will complete before closing with a contingency clause that allows the buyer to inspect and approve the work, or walking away from the deal if the issues are too significant or the parties cannot reach an agreement.

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4 How to use an escrow holdback effectively

If you decide to use an escrow holdback for repairs, you should consult with your real estate agent, lender, and attorney to understand the legal and financial implications of the process. Negotiate the amount, terms, and conditions of the escrow holdback in writing and include them in the purchase agreement or an addendum. Choose a reputable and neutral escrow agent or company to hold and disburse the funds, paying attention to their fees and procedures. It is essential to communicate clearly and frequently with all parties involved, documenting the progress and completion of the work. Finally, inspect and verify the quality and compliance of the repairs before releasing the funds or closing the deal.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the pros and cons of using an escrow holdback for repairs?

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1 Pros of escrow holdback

2 Cons of escrow holdback

3 Alternatives to escrow holdback

4 How to use an escrow holdback effectively

5 Here’s what else to consider

Real Estate Negotiating

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