Episode 20 | Escalations and choosing the best contract

Our sellers are often receiving multiple offers with escalation addendums. What are they? How do they work? What else matters? Today we fill you in. If you’re thinking of selling your home, you need experienced advice to guide you to the best result. 

So last week we went over our May monthly update on the market and if you do everything right as a seller these days, there’s a good chance you’re going to get multiple offers. So Jim, tell people what an escalation addendum is, because we had ten on our last home we put on and nine of them had escalation addendums.

What is an escalation addendum?

An escalation addendum is something that’s used in a competitive offer situation. There’s multiple buyers going after the same property.

Here are the three main parts to the escalation addendum; how much you’re going to beat the next best offer by, what increment, what the max price is that you’re willing to escalate up to, and does your contract, does your offer, retain or waive the appraisal?

So for example, if it’s a $500,000 listing and we might say, okay, this offer is going to beat the next higher offer by $2,000, up to a maximum of $515,000 But let’s say that second offer was only $510,000, this would only escalate by the $2,000 up to $512,000 not up to that max escalation price, so. That’s in essence how an escalation clause works and how it competes with other offers that are submitted.

One note on what Jim just said, the offers when they escalate, they’re based on the net to the seller. So if contract number one offers $510,000, but they’re asking for $5,000 in closing costs their offer is really $505,000. And even if it goes down to if they’re offering $510,000 but they then want the seller to pay for a $500 warranty policy again it’s not $510,000, but $509,500.

Other factors to consider in a multiple contract situation:

Financing: what type of financing they have, on FHA or VA, you can’t truly waive the appraisal so that is something as well that’s gotta be taken into consideration when looking at those. The VA and FHA have an inspection component to them. There is a little more risk with those.

Earnest money deposit: how much skin in the game the buyer has, the appraisal that we touched on. And that could also, you know, even if you don’t waive the appraisal, maybe you say, we’ll cover up to $10,000 in the event of a low appraisal giving the seller some assurances.

Down payment: Amount of the down payment, if they might have some additional funds if you’re in the event of a low appraisal or if they’re putting down enough, they might not need an appraisal.

Inspections: did they waive the home and rate on inspection or do shorter periods.

Home Warranty: are they asking for the seller to pay for one?

LenderWho is the lender?  That’s something that’s big. If it’s a local lender that we’ve worked with, that we know is gonna get it done versus maybe some of the big banks that are a little slower and not quite as reliable. And are they asking for closing cost assistance, as Tom mentioned, that affects the net price to the seller.

Agent: Who is the buyer’s agent? If we’ve worked with them before, if we know that they’re going to be good to work with, they’re going to communicate well.

WDI (wood destroying insect/ termite inspection)Who’s paying for that if they’re doing one.

So yeah, those are a few of the additional factors we’re looking at when we have a number of offers. Price, a lot of times, is one of the bigger ones. It carries a lot of weight. But all of these other ones do come into play as well when we’re evaluating with our sellers.

Everyone wants to get the best price. Our job, we feel like, is to get them the best contract. So that’s the best mix of price and all the other terms of the contract. If you’re thinking about selling your house and you’d like to get the best advice in helping you to achieve the results that you’re looking for, give us a call. We’d love to work with you 703 822 0207. Thanks for watching this video.We release new videos each and every Wednesday, so feel free to go ahead and subscribe to our YouTube channel. We look forward to seeing you next week.

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