Brought to you by Scott P. Rogers, Funkhouser Real Estate Group, 540-578-0102, scott@HarrisonburgHousingToday.com
Brought to you by Scott P. Rogers, Funkhouser Real Estate Group, 540-578-0102, scott@HarrisonburgHousingToday.com
Wednesday, June 23, 2021
Escalation clauses are so YESTERDAY!?! ;-)
Not really -- many/most buyers are still using them -- but they don't matter much if an appraisal is going to rein a sales price back in...
Consider these three offers on a fictional home listed for $300K...
- $305K escalating by $5K up to $320K contingent on an appraisal
- $310K escalating by $5K up to $350K contingent on an appraisal
- $320K escalating by $5K to $375K contingent on an appraisal
Hooray, the house sells for $355K to buyer #3, right?
Well, probably... though if it then appraises for $300K, then none of the offer prices over the list price or the escalation clauses really amounted to anything.
Thus, these days, many buyers are not only asking themselves how high they are willing to go with an escalation clause -- they are also asking themselves how much above the appraised value they are willing to pay for a house.
Consider, then, the following three offers on the same house listed for $300K...
- $325K contingent on an appraisal
- $325K and willing to pay $25K over appraised value
- $335K and willing to pay $10K over appraised value
Clearly, a seller would toss out the first offer.
Some sellers would then immediately jump to the third offer, since it is $10K higher than the second offer -- but -- that depends on your best guess as to the appraised value of your house.
If you listed your home for $300K, presumably you think it should sell for around $300K and thus might appraise for $300K. If that is the case, then the second offer above is likely a better choice for you. That offer would stay at $325K even if the appraisal came in at $300K, whereas the third offer would start off higher at $335K but would then drop to $310K if the appraised value were $300K.
So, as a buyer -- consider how much above the appraised value you are willing to pay for a house when you are competing with multiple other offers -- and as a seller, consider how an appraisal will impact each offer that you might accept.
