The world of real estate can be complex and fast moving, and whether you are hoping to become a real estate owner soon, or a seasoned real estate mogul there may be concepts that are difficult to understand. The frequent occurrences within real estate transactions that are often confused are Holdbacks and Credits.
Holdbacks
When an offer to purchase real estate is accepted there are important dates referenced in the agreement. The most important date is the closing date, which is when the buyer takes possession of the property. Prior to the closing date, there are obligations the seller must meet, and conditions for the buyer to meet. The usual conditions for the buyer to check off are attaining financing, insurance and conducting an inspection, to ensure they have completed all their due diligence.
At any point on or before the closing date, there may be damage or defects across any part of the property. In this situation, the buyer will seek an estimate for the repairs, and then contact their agent and lawyer, to request that the seller fix the issues. The agent and lawyer will bring the request to the seller, if the seller agrees, a portion of the sale is held back. The Holdback amount is based on the estimated cost to fix the issues, which is released to the seller once the work has been completed.
Credits
If a buyer wants to have more control over how the work is done, or they would rather take on the repairs themselves, the buyer may seek a Credit instead of a Holdback. In this case the buyer can request a Credit, equal to the amount of the repairs. Credits are typically preferred in residential real estate transactions because they are essentially a reduction of the overall purchase price.
When are Holdbacks & Credits Applicable?
If the property is not in the condition agreed upon before, or on the closing date, you may be entitled to a Holdback or a Credit. Situations where buyers request Holdbacks or Credits can vary drastically. Typically, a Holdback or Credit is in relation to a material defect, meaning something that impacts the foundational enjoyment or use of the property, or a condition laid out within the agreement for purchase of sale. Examples of material defects could include:
- Cracks in the foundation
- Defective well and septic systems
- Electrical or plumbing defects
- Any structural damage to the property
- Missing or broken windows, insulation, or doors
- An unreasonable amount of garbage or debris left on the property
- Broken appliances such as fridges, stoves, washers, and dryers
Things to consider when Negotiating Holdbacks & Credits
Holdbacks and Credits require specific language. This is to ensure that the work that needs to be completed is captured within the Credit or Holdback, and that there are alternative solutions if the work is not completed within a timely manner. For example, if on the day of closing the seller has left an unreasonable amount of garbage in the yard, if the buyer were to ask for a Holdback, they should specify how the garbage is to be removed, and the desired condition of the yard post-removal. By doing this you ensure that the removal is done properly, and that if there is further damage caused by the removal you are covered.
Another thing to consider when negotiating a Holdback or Credit, is to ensure that the request is reasonable. For example, if on the closing date the buyer finds that the fridge has broken since the inspection, they may ask for a Credit for the value of the fridge. This does not entitle them to the full amount of a new fridge, only the value of the fridge you would have received in the purchase of the property. In this example, it would not be reasonable to ask for a Credit of $5000 for a brand new, state of the art fridge, if the broken fridge was 20 years old.
Looking for Guidance?
If you think you may want to negotiate a Holdback or Credit, or have any further questions about Real Estate transactions, please contact our Real Estate team here at BOYNECLARKE LLP.