Escalation clause questions

[Anonymous]

Anonymous wrote:Arlington agent here. Remember its not just the price in competitive properties. I've had sellers who have taken an offer for a smaller amount of money because the winning offer was not contingent on an appraisal or a home inspection. If the seller is waiting several days for offers, you can ask to have a home inspection done before you submit your offer. I always tell sellers to allow the home inspection as it is reassuring to buyers to understand what they may have to forego. The appraisal is hard to give up, but if you want to be in a good house in a good area and have lost several bidding wars, you have to clench your gut and proceed. Incidentally, real estate agents do not have the power to control markets as many of you believe. If we did, we would have many more houses on the market so that buyers did not have to go to the lengths I've described to buy a good house.

I'm not anti-agent, but if you're telling buyers to waive home inspection and appraisal contingencies, especially if you're on the buy-side of the transaction, you suck.

No house is worth that. You are not fulfilling your fiduciary responsibility to your clients.

For one thing, the home inspection contingency is a gateway to a second round of negotiations, including money.

And the appraisal contingency not only affects price of the house itself (which would have to be renegotiated if it doesn't appraise), it affects the financing contingency.

Sometimes the agent should just tell the client, "there will be other houses."

Don't allow their emotion and frustration with a tough buyer's market to make stupid financial decisions. Keep them OUT of those houses.

[Anonymous]

I don't think escalation clauses are unusual in certain areas in this market. My realtor friends tell me they're definitely not unusual in North Arlington. I haven't had to use one, thank goodness, because there's probably no way I'd win in a bidding war. (Single mom who bought for $560K in a zip where the median home price is over $850K.)

[Anonymous]

Anonymous wrote:We lost a house recently in a bidding situation with escalation clauses; it went for 1000 over our cap. Oh well. Not crazy about escalation clauses, but the PP makes a valid point when saying it might be fairer than bidding against yourself blindly in a "best and final offer" situation. FWIW, we previously lived in NY area and never heard of escalation clauses before moving to DC.

OP here. Do you regret this? Do you wish the sellers gave you a chance to up your price? I can't imagine losing the "right" house over $1000.

[Anonymous]

We recently chose a slightly lower offer over another one because of the terms of the offer, so depending on the seller, the price may be just one factor they are considering when evaluating offers.

[Anonymous]

Anonymous wrote:

Anonymous wrote:We lost a house recently in a bidding situation with escalation clauses; it went for 1000 over our cap. Oh well. Not crazy about escalation clauses, but the PP makes a valid point when saying it might be fairer than bidding against yourself blindly in a "best and final offer" situation. FWIW, we previously lived in NY area and never heard of escalation clauses before moving to DC.

OP here. Do you regret this? Do you wish the sellers gave you a chance to up your price? I can't imagine losing the "right" house over $1000.

Not PP, but remember that the winning bidder's clause likely went higher than $1000 over. $1000 is just the increment over the top of PP's escalation clause.

[Anonymous]

We've now lost two houses in North Arlington in this competitive market. In one situation, the other offer had a higher escalation ceiling (~$5k) and the other sold for less than $2k over our ceiling price, but they apparently dropped the appraisal contingency. The second property might have been "the one" and we are still reeling from not getting it and if we could go back, would have dropped the appraisal contingency. We're still looking and it's pretty much the most frustrating thing ever.

[Anonymous]

11:48, you really wish you had dropped the appraisal contingency? We lost over this, too. Our bid was higher than the winner. Sad about it, but worried that dropping it was too risky.

How do you decide if dropping financing and appraisal contingencies is worth the risk?

[Anonymous]

Anonymous wrote:11:48, you really wish you had dropped the appraisal contingency? We lost over this, too. Our bid was higher than the winner. Sad about it, but worried that dropping it was too risky.

How do you decide if dropping financing and appraisal contingencies is worth the risk?

At the time, we didn't want to take the financial risk of having to come up with the cash if it appraised to low. Looking back, we think it would have appraised at or above our offer price due to the recent comps in the neighborhood and area as a whole. Also, we've been at this for almost 6 months and just don't know if there's anything better out there... so in hindsight, the house was worth the risk.

[Anonymous]

Anonymous wrote:

Anonymous wrote:11:48, you really wish you had dropped the appraisal contingency? We lost over this, too. Our bid was higher than the winner. Sad about it, but worried that dropping it was too risky.

How do you decide if dropping financing and appraisal contingencies is worth the risk?

At the time, we didn't want to take the financial risk of having to come up with the cash if it appraised to low. Looking back, we think it would have appraised at or above our offer price due to the recent comps in the neighborhood and area as a whole. Also, we've been at this for almost 6 months and just don't know if there's anything better out there... so in hindsight, the house was worth the risk.

Correct me, but can't you still walk away if you drop the appraisal? You just lose your earnest money? What is typical earnest money in N. Arlington?

[Anonymous]

Anonymous wrote:Correct me, but can't you still walk away if you drop the appraisal? You just lose your earnest money? What is typical earnest money in N. Arlington?

On a previous offer we put up $15k as earnest money. We learned from the selling broker later than this was one of the lower amounts.

[Anonymous]

I would be cautious. We used an escalation clause and rather than taking our escalation clause, the other agent threw out a counter offer between our low and high bid. Since he wasn't using the clause, he didn't disclose the other bidders info so we had no idea where our bid came in. We wanted the house so we took it (we also had a lousy agent so there was no real negotiation from our side - a lesson learned) but we always felt like we got screwed out of $20,000.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Anonymous wrote:11:48, you really wish you had dropped the appraisal contingency? We lost over this, too. Our bid was higher than the winner. Sad about it, but worried that dropping it was too risky.

How do you decide if dropping financing and appraisal contingencies is worth the risk?

At the time, we didn't want to take the financial risk of having to come up with the cash if it appraised to low. Looking back, we think it would have appraised at or above our offer price due to the recent comps in the neighborhood and area as a whole. Also, we've been at this for almost 6 months and just don't know if there's anything better out there... so in hindsight, the house was worth the risk.

Correct me, but can't you still walk away if you drop the appraisal? You just lose your earnest money? What is typical earnest money in N. Arlington?

Please correct me if I'm wrong, but here's my understanding: the appraisal and the financing contingencies are different things. An appraisal contingency means you can lower the price to the appraised price after the contract, the financing contingency says if the bank appraises the home as worth less than the mortgage amount and therefore refuses you the mortgage the contract is void unless you choose to come up with the difference. We just lost on offer where we waived the appraisal and the inspection (had pre-inspection) but maintained the financing contingency.

PS 11:48 we are reeling too. This was definitely *the one*. It hurts!

[Anonymous]

Anonymous wrote:

Please correct me if I'm wrong, but here's my understanding: the appraisal and the financing contingencies are different things. An appraisal contingency means you can lower the price to the appraised price after the contract, the financing contingency says if the bank appraises the home as worth less than the mortgage amount and therefore refuses you the mortgage the contract is void unless you choose to come up with the difference. We just lost on offer where we waived the appraisal and the inspection (had pre-inspection) but maintained the financing contingency.

PS 11:48 we are reeling too. This was definitely *the one*. It hurts!

I don't think this is correct.

An appraisal contingency means you can walk and recover your earnest money if the house doesn't appraise for the contract price. It can open a new round of price negotiations, but the seller isn't required to automatically lower the price to what an appraiser says it's worth.

In a financing contingency, a bank won't give you a loan if it doesn't appraise. So, basically you have the same choices as under an appraisal contingency: Walk, negotiate the price lower, or make up the difference in cash if you really want the house and the seller won't budge on price.

Of course if the seller won't budge, that lower appraisal is out there already. So, it's leverage for you in negotiations. Depends on how motivated the seller is and whether or not there's another buyer waiting in the wings who might be willing to pay more.

[Anonymous]

Anonymous wrote:

Anonymous wrote:

Please correct me if I'm wrong, but here's my understanding: the appraisal and the financing contingencies are different things. An appraisal contingency means you can lower the price to the appraised price after the contract, the financing contingency says if the bank appraises the home as worth less than the mortgage amount and therefore refuses you the mortgage the contract is void unless you choose to come up with the difference. We just lost on offer where we waived the appraisal and the inspection (had pre-inspection) but maintained the financing contingency.

PS 11:48 we are reeling too. This was definitely *the one*. It hurts!

I don't think this is correct.

An appraisal contingency means you can walk and recover your earnest money if the house doesn't appraise for the contract price. It can open a new round of price negotiations, but the seller isn't required to automatically lower the price to what an appraiser says it's worth.

In a financing contingency, a bank won't give you a loan if it doesn't appraise. So, basically you have the same choices as under an appraisal contingency: Walk, negotiate the price lower, or make up the difference in cash if you really want the house and the seller won't budge on price.

Of course if the seller won't budge, that lower appraisal is out there already. So, it's leverage for you in negotiations. Depends on how motivated the seller is and whether or not there's another buyer waiting in the wings who might be willing to pay more.

Oh I agree, I certainly didn't mean the price defaulted to the appraised price. My apologies for lack of clarity, pp was much clearer. My point was mainly that they are different contingencies, both of which protect the buyer in the event of a low appraisal.

[Anonymous]

Anonymous wrote:
Correct me, but can't you still walk away if you drop the appraisal? You just lose your earnest money? What is typical earnest money in N. Arlington?

11:48 & 12:13 here. We actually put down $25k for earnest money. So yeah. Didn't want to lose that...

PS 14:29 losing the one is the pits. Fingers crossed we can both find something better!