An escrow holdback might become necessary when damage happens or is discovered while the house is still under contract. Let's say a natural disaster occurs, like a hurricane, flood, or tornado, which damages the property. Or maybe there's torrential rainfall that reveals a pre-existing condition like a leaky roof, which wasn't discovered during the inspection. The seller, since they didn't plan to make any (or any more) repairs, might not have time to make a new repair before the closing date.
Maybe weather conditions prevent any work from being done before closing, as what often happens with outdoor projects during the winter, such as putting on or fixing a new roof, deck or driveway maintenance, septic system repairs, and landscaping issues.
Escrow holdbacks might become necessary with new construction. Homes are often not completed by the closing date. Rather than trusting the builder to come back to the home after the sale, holding money back in an escrow account often motivates the builder.
If a lender is involved
If the buyer will be taking out a mortgage to buy the home, the borrower would need to get their mortgage lender to agree to an escrow holdback. Lenders typically won't close if a home needs repairs since they loan only a percentage of the home's value, and until the necessary repairs are made, the appraisal won't be accurate. If the lender agrees to an escrow holdback, the closing can happen on time, and once the seller makes the repairs, the lender is informed and then appraises the home.
A mortgage company often requires 120% of the repair costs be set aside and held in an escrow holdback account. The extra money serves to motivate the seller and to guard against rising prices that could happen if the project is delayed, perhaps until the next season.
Lenders don't always allow escrow holdbacks
Escrow holdbacks aren't an option for every situation. Lenders typically won't allow an escrow holdback for major issues that would deem the home an unsafe dwelling, such as a structural defect or an unsafe staircase, for example.
A similar method: the seller credit
A seller credit, also called a repair credit, is money the seller offers to the buyer that reduces the sale price of the home, allowing the buyer to make the needed repairs. This often happens with the seller paying all or part of the closing costs, which are usually between 2% and 5% of the home's purchase price.
If a buyer, after receiving an inspection report, makes the transaction contingent on the seller completing repairs, and if the seller doesn't have the time and/or money to comply, the buyer can ask for a seller credit.
A seller credit accomplishes the same thing as an escrow holdback in that money for needed repairs to the property will be set aside. The difference between an escrow holdback and a seller credit is that the seller is responsible for repairs with an escrow holdback and the buyer is responsible for repairs with a seller credit.
The Millionacres bottom line
An escrow holdback can create a win-win situation for the buyer and the seller. The seller doesn't lose out on a sale, and the buyer can close on time with assurance that repairs will either be taken care of or there will be money set aside in case they aren't.