Wallace Realty Group, LLC

It never fails… I’m working with a seller and we get an offer. I often have to calm down the excited emotions so that they can fully understand all the terms of the offer other than just the amount and the closing date.

See… On the seller side. Once an offer is accepted there is a lot of waiting. Most of the work is being done on the buyer side… Getting appraisals, inspections, loan origination (if not a cash offer). So at some point… Even though we’ve gone through the terms, including the closing date, there is an antsy feeling and the question then becomes… “WHEN CAN WE CLOSE?”

Now, there are exceptions. But a general rule of thumb is to allow 35-45 days from the offer acceptance date for the home to close. First, all of the contingencies need to clear, which are typically inspection and of course financing/appraisal. Then there are legal disclosures that need to be made at specific times before closing (TILA/RESPA, Closing Disclosures), that are all happening on the buyer side as you, the seller, wait until you can sign the deed over.

There are programs and lenders who can work quickly and can expedite things and of course if your buyer is paying cash you can move things along much faster. But keep this in mind as you’re planning your move.

An appraisal gap is the difference between the fair market value determined by an appraiser and the amount you agreed to pay for the home.

You can provide a partial appraisal gap or an appraisal gap for the full amount to cover the value and the amount you agreed to pay.

When used in conjunction with an escalation clause when submitting an offer during a bidding war, an appraisal can help to strengthen your offer in the event that the property you are offering on does not appraise for the amount you offered.

Example

John and Mary find the home of their dreams. They’re ready to make an offer and find out there are multiple offers on the property. Not knowing what the other offers are, they want to put their best foot forward and write a strong offer, giving them the best chance to get the home.

They decide to write an offer above asking and include an escalation clause with a partial appraisal gap to bridge the gap between the potential appraised value and their offer. Here is what that would look like:

• Home price: $325,000.00
• John and Mary’s offer: $330,000
• Escalation clause: Buyers increase the purchase amount by $1000.00 over the highest offer up to $340,000.00. A valid and verified purchase agreement showing the next competing offer will be provided to the buyers.
• Appraisal gap: In the event of buyer lender’s appraisal establishes value less than sale net price. Buyer will contribute up to $5,000.00 above the appraised value.

Bottom Line

Appraisal gaps can be a valuable tool in your arsenal in a competitive market if you have the financial capacity to utilize it. Let’s connect if you’re considering buying or selling a property and we will discuss all of your options.

In the ever-evolving world of real estate, it’s crucial for both buyers and sellers to stay informed about the latest trends and strategies. One such strategy that has been gaining popularity in recent years is the use of escalation clauses. While the term might sound a bit intimidating, it’s actually a tool that can benefit both parties involved in a real estate transaction. So, let’s dive into the world of escalation clauses and explore what they mean for buyers and sellers.

Simply put, an escalation clause is a provision that can be added to a purchase offer. It allows the buyer to automatically increase their offer by a predetermined amount if there are competing offers on the table. For example, let’s say you’re interested in purchasing a charming bungalow, and you’re willing to pay up to $300,000. However, you’re aware that there might be other buyers interested in the property. In this case, you could include an escalation clause that states you’re willing to increase your offer by $5,000 above any competing offer, up to a maximum of $320,000.

Here is what that would look like:

The buyer increases there offer $5000.00 above the highest offer up to $320,000.00. A valid and verified Purchase Agreement showing the highest competing offer will be provided to the buyer.

Now, you might be wondering how this benefits the buyer. Well, the main advantage of an escalation clause is that it helps you stay competitive in a seller’s market. When there’s high demand for properties and limited inventory, it’s not uncommon for bidding wars to occur. With an escalation clause, you can ensure that your offer remains at the top of the pack without constantly having to revise and resubmit your offer. It saves time and minimizes the risk of losing out on a property you truly desire.

On the other hand, sellers can also reap the benefits of escalation clauses. First and foremost, it creates a sense of urgency among potential buyers. When they see that there’s competition and that they need to act quickly, they’re more likely to submit their best offer right away. This can lead to higher sales prices and a quicker sale for the seller. Furthermore, escalation clauses can help sellers avoid lengthy negotiations. Instead of going back and forth with counteroffers, the seller can simply accept the highest offer with the escalation clause, streamlining the negotiation process.

However, it’s important to note that there are some potential drawbacks to using escalation clauses. For buyers, there’s always the risk of overpaying for a property. If you’re not careful with setting a reasonable cap, you might find yourself committed to an offer that exceeds the property’s true value. Additionally, some sellers might find escalation clauses off-putting, especially if they prefer straightforward negotiations. It’s always a good idea to consult with a real estate professional who can guide you through the pros and cons of using escalation clauses in your specific market.

Bottom Line

Escalation clauses can be a valuable tool for both buyers and sellers in the real estate industry. They allow buyers to remain competitive in a seller’s market and increase their chances of securing their dream property. For sellers, escalation clauses create a sense of urgency and can lead to higher sales prices. However, it’s crucial to approach the use of escalation clauses with caution and seek guidance from professionals to ensure that they are used effectively and to everyone’s advantage. So, the next time you’re navigating the competitive world of real estate, consider the potential benefits of including an escalation clause in your offer.

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