Question 1

When is a holdback escrow used at closing?

Accepted Answer

Holdback escrows are used at closing when: the property needs repairs that cannot be completed before closing (the parties want to close on time rather than delay), building permits are open and need to be closed (a common issue in Florida), a title defect has been identified but cannot be cured before closing (e.g., a missing satisfaction of mortgage), the property tax prorations are estimated and the actual taxes are unknown, the seller has not completed a contractual obligation (final inspection, survey delivery), or a construction project is not yet complete (new construction or renovation). The holdback allows the parties to close while ensuring the outstanding issue will be resolved.

Question 2

How much should be held back in a closing escrow?

Accepted Answer

The holdback amount should be: sufficient to cover the cost of the outstanding work (typically 1.5 to 2 times the estimated cost, to account for overruns), agreed upon by both buyer and seller (documented in the purchase contract or closing addendum), based on written estimates from qualified contractors (not guesses), adjusted for the complexity and risk of the work (more complex work warrants a larger holdback), and consistent with the escrow agreement's terms. For title defect holdbacks, the amount is typically the full amount needed to cure the defect plus attorney fees. For permit holdbacks, the amount should cover the cost of completing the permitted work plus inspection fees.

Question 3

What happens if the holdback conditions are not met?

Accepted Answer

If conditions are not met by the deadline: the escrow agreement typically provides that the funds are released to the buyer (to complete the work themselves or as compensation), the escrow agent may require written direction from both parties before releasing funds, if the parties disagree, the escrow agent may file an interpleader action (depositing the funds with the court and asking the court to determine who is entitled), the buyer may have additional remedies under the purchase contract (breach of contract claims), and the seller may lose the holdback amount plus face liability for any additional costs. Well-drafted escrow agreements include clear default provisions to avoid litigation.

Holdback Escrow: Closing

Holdback Escrow at Closing

When Used

Amount Guidelines

If Conditions Unmet

Related Terms

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