Lately, with inventories of homes decreasing and demand for them increasing, you can bank on a bidding war for a home good condition or location. A Buyer who has come in second place multiple times is extremely motivated to just win a home. The Seller is very happy with a higher sales price.
Here is how it might work. You may offer $500,000 to purchase a home with an escalation clause stating that you will outbid other offers by $5,000 up to a maximum $515,000. So if another buyer makes an offer of $505,000, your escalation clause kicks in and you now offer $510,000 for the home. If Buyer 3 offers $517,000, then according to your escalation clause you are out of the bidding, because the offers have gone over your $515,000 ceiling or cap. It is a good way for Buyers to be very competitive and not wildly over bid for a home.
The dynamics of the process vary a great deal based on:
How much experience both Real Estate Agents have
The one thing that affects both the Buyer and Seller is the Appraisal. The Appraisal and Financing Addendum is a part of most Northern Virginia Contracts. It is the great equalizer and independent of Buyer/Seller because the Appraisal is ordered by the Mortgage Adjuster to ensure they are not financing an over-valued property. If your winning escalation price for the home was $510.000 and the home appraised at $500,000 or $520,000. The Buyer may elect not to proceed with the Sale either because they can’t come up with the additional monies need to get to $520,000 (cash plus original loan) or because of a low appraisal and the Seller is not willing to negotiate the sale price down to the new appraised value. Usually this negotiation takes place and saves the day.