HOME ESCALATION

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 Buyer agent has to gauge the demand for the home and place the escalation amount accordingly without hurting the Buyer
• The Seller agent has to correctly figure the Net Sale prices as offers continue to be presented, and explore which has the stronger financing

Factors for the Buyer and Seller are

• Some Sellers just don’t like drama, feel your best offer should have been the first, and may just really like the Buyers
• Tiny escalations might anger the seller
• Sellers may not be MOST interested in the money.  It may be the Closing Date needed, their perception of how aggressive certain Buyers will approach the Home Inspection Addendum, ect.
• The Buyers may think they have the extra cash for escalation and be working with a below average Mortgage agent
  

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. 

Some Buyers, in an effort to have no barriers for the Seller, waive the Appraisal part of the Addendum.  This is very risky for a cash strapped home buyer because it takes the above negotiation out of the contract and they have to find a lot of money should the appraisal come in high.  If the Buyers are fortunate enough to have an experienced Agent who knows they are desperate enough to want to waive the Appraisal then some language can be added to the contract mitigating their risk.

So be careful but GET THAT HOUSE.