I am a licensed realtor in Virginia, so the subject matter presented here applies to Virginia only. It may or may not apply to your state, as contracts and addenda are state-specific. The opinions presented here are my own. Please consult your realtor for your specific situation.
Today, I’ll be answering the question, “Should I use an escalation addendum in a seller’s market?” As with most things in real estate, there isn’t always a simple answer.
If the house has been on the market more than one week, it was probably either overpriced or does not show well. The listing will probably not be getting multiple offers unless they had a large price reduction. In this case, I probably wouldn’t use an escalation addendum.
In a strong seller’s market, you will find that most listings that are priced well and show well will get multiple offers. In cases like these, I would usually recommend using an escalation addendum. Let’s delve a little deeper though.
What is an escalation addendum?
First, let’s talk about what an escalation addendum is.
An escalation addendum is an optional addendum or form that you can add to your offer to make it more competitive. It escalates the price you offer by a certain increment above any other offer up to a price ceiling that you set.
For example, say you offer $500,000 on a house and have an escalation up to a ceiling of $530,000, offering $2,000 above any other offer.
If someone else offered, $510,000, your offer would automatically escalate up to $512,000.
If someone else offered, $530,000, your offer would remain at $530,000 since it hit your ceiling.
If someone else had an escalation up to $525,000, your offer would be $527,000.
The escalation addendum also has a section where you choose whether to waive or retain the appraisal. I’ll talk about this a little further down in this post.
How do you know if a listing has multiple offers?
Now, let’s discuss a few other things. In a seller’s market, many listings will receive multiple offers. Some listings will receive more than 20 offers. However, this doesn’t mean ALL listings will receive multiple offers. Some listings may go months without any offers.
There are a few ways to gauge how popular a listing is or how many offers it has. The easiest way is to have your agent ask the listing agent. Many listing agents will disclose how many offers their listing has or whether or not they’re getting a lot of showing requests. There are very few cases in which the seller asks the listing agent not to disclose this information.
Another way to get an idea of the popularity of a listing is to attend the open house (if there is one). If the open house is super busy, there’s a good chance there will be a multiple offer situation.
You can also get a good gauge by scheduling a showing with your agent. While you’re there, if there are people looking at the house before and people waiting for you afterwards, you know it’s a popular listing. You can also ask the agent how difficult it was to schedule a showing, as showing times that have already been reserved will be blocked off.
Finally, apps like Redfin indicate “Hot Homes” by using traffic data and amount of people that have saved the house under Favorites. Zillow shows how many people viewed the house and how many people saved it. Homesnap is affiliated with our MLS but does not currently show any data about traffic or popularity.
Price is not the only factor.
Keep in mind that price is not the only factor a seller considers when reviewing offers.
There are many other factors a seller will consider, including: cash or mortgage transaction, strength of financing (if there’s a mortgage), settlement date, rent back terms (if needed), home/radon inspection contingency, financing/appraisal contingency, your agent’s professionalism, etc.
Just because you have the highest offer price does not guarantee you will win. If you have a home inspection contingency with option to negotiate repairs or void and someone else waived the home inspection, the seller may value the waiver of the home inspection at $5,000 or even $10,000. Waiving a home inspection reduces a lot of worry for the seller, and it’s hard to put a price on a waived home inspection.
Related post: Should I Waive a Home Inspection in a Seller’s Market?
Should I use an escalation addendum in a seller’s market?
So, let’s answer the question. If you’re looking for a house that you think many other people will like (updated/renovated, turnkey/move-in ready), and you know there are multiple offers, I would highly recommend using an escalation addendum.
An escalation addendum assures you will only pay a certain amount more than the next highest offer, and it allows you to set a price ceiling at your upper limit.
The only issue is, if many other buyers are using escalation addendums, the person with the highest price ceiling will likely win.
Winning a bidding war is great because you’ll get the house you want, but it also means you were willing to pay more than almost anybody else. If the market turns, you may have a harder time recouping your costs.
What does the escalation addendum have to do with an appraisal?
Let’s get back to something I mentioned above: the appraisal. You’ll notice that, in the escalation addendum, there is an option to waive or retain the appraisal.
If you have an appraisal contingency in your offer, it essentially gives you the right to back out of the contract if the house appraises for less than your offer price. Your other options are to meet somewhere in the middle in terms of price, or you can agree to pay the price you offered.
In a bidding war, where people are escalating prices higher and higher, there is a good chance that appraisals may come in low. Waiving the appraisal contingency means you are still committed to buying the house, even if the appraisal comes in low. A seller may consider accepting a lower sales price with a waived appraisal contingency instead of risking a higher sales price where the buyer may back out or try to negotiate a lower price in the case of a low appraisal.
Can you give some real life examples?
I’ll provide a couple of examples from offers I’ve made in the past.
Example 1:
In a recent transaction, a house was listed for $520,000. I went to look at the house on a Monday morning, and there was an offer deadline for that evening.
I spoke to the listing agent, and she told me she had already received 3 offers.
I ended up making an offer for $530,000, escalating $2,000 above any other offer up to $552,000. I did home inspection with option to void only, waived radon, waived appraisal, and had a strong 30% down payment. We ended up winning and only escalated to $532,000, $2,000 above our offer price and $20,000 below our ceiling.
Example 2:
There was another house that was listed for $774,900. It was a while ago, so I don’t remember exactly how many offers they had. I think there were 2 or 3 other offers.
We ended up offering $790,000, with an escalation of $2,000 above any other offer up to $802,000. We did home inspection with option to void only, waived radon, waived appraisal, and had a strong down payment. We ended up winning and only escalated to $792,000, $2,000 above our offer price and $10,000 below our ceiling.
These are just two examples. Every situation is unique, depending on city, county, neighborhood, school district, size of house, etc.
If you have questions or comments, please comment below or contact me at realtordannylee@gmail.com.
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