Cashbacks & Holdbacks
In some situations, particularly following an inspection of a property, a seller will be asked by a buyer to agree to a cash-back which will provide the buyer with funds necessary to complete repairs identified during that home inspection. Be careful before agreeing to such an arrangement as the following is a typical scenario.
- The buyer’s lender will see the cash-back arrangement as a reduction in the purchase price.
- As a result, the buyer’s lender could reduce the amount of mortgage money available to the buyer.
- The buyer may actually have to produce more money on the completion date.
All of this will complicate or delay the closing of the sale.
If you are considering compensating the buyer for repairs identified during a home inspection, or for any other reason, here are some suggestions to more effectively deal with the situation.
- Simply reduce the purchase price. By doing so, the buyer will fully understand their mortgage options well in advance of the completion date, and will minimize the potential for delays in completing your sale.
- If the buyer insists on a cash-back arrangement, we suggest the contract contain provisions which require that the cash-back amount be held in a lawyer’s trust account with such funds being released only upon receipt of invoices evidencing that the repairs for which the cash was held back have been completed. Additionally, all payments from the lawyer’s trust account should be made directly to the contractor performing the work to mitigate any lender concerns that a buyer is obtaining a cash kickback to which they should not be entitled.
- Rather than a cash-back, have the amount in question paid directly to a renovation company, supplier or contractor.
During the course of a real estate negotiation, you may hear someone suggest using a holdback to resolve an issue between the parties. One example is where a deficiency is noted during a home inspection. The buyer may ask the seller to make the appropriate repairs. However, to ensure the seller is sufficiently motivated to make such repairs, the buyer may propose holding back a portion of the sale proceeds until the repair is completed. In general, we recommend avoiding such holdback arrangements. Although they are intended to resolve a situation, they may in fact complicate the real estate transaction. The complication arises out of the following.
- As a seller, you will want to make any repairs at the lowest cost and with the least amount of effort as possible.
- Once repairs are made, there may be a dispute between the buyer and seller with respect to whether or not the repairs were made to the standard contemplated by the parties at the time the contract was signed.
- If the parties cannot agree on whether or not a repair has or has not been made, they will expend additional time, energy, and money arguing over what may have been a relatively minor issue to begin with.
- The wording of holdback clauses is tricky. Extra wording is required to cover all the different outcomes such as a failure to complete the repairs before the completion date and the consequences of this.
If a deficiency is noted which requires repair, it is far simpler to negotiate a reduction in the purchase price or provide payment to a third party and make the buyer responsible for the repairs. Please note, this can lead to complications for the buyer such as a reduction in their mortgage eligibility. We urge all buyers to read the Buyer’s Section of our website for details on this issue. This avoids disputes with respect to whether or not a repair has been adequately completed and gives a buyer full control over the manner in which a repair is completed.