I have had a number of real estate agents reach out to me from different cities asking about a blog post I wrote a bit ago. Although we have seen a competitive market for years, they are not starting to see contracts written with escalation clauses and appraisal gap guarantees. It appears homebuyers are starting to compete for homes nationallyand they are starting to see multiple offers for the first time. I wrote about the gold standard of multiple offers in 2018, here and, although, today this is typical practice for homebuyer’s offers in Denver it is very helpful to both agents and buyers to understand this practice.
Let’s look at what wins a multiple offer situation again:
Escalation Clause: This clause is when a buyer writes an offer to pay more than the highest offer by a certain amount.
Example language: “Buyer to pay $2,000 above the highest offer up to $500,000. Seller must supply a copy of the highest bona fide offer.”
While the purchase price gets pushes higher with multiple offers and escalation clauses the concern becomes appraisal and appraised value. A buyer can only get a loan for what the home is appraised for. This concerns leads to the next clause that we have seen in contracts, the appraisal gap guarantee clause.
Appraisal Gap Guarantee Clause: This clause states that if the home were to appraise lower than the stated purchase price, the buyer would bring money above appraised value OR make up the entire difference between the appraised value and purchase price.
Example language: “In the event the appraised value comes in below Purchase Price, then Buyer agrees to pay up to $6,000.00* over appraised value not to exceed purchase price. Any such cash differential shall be applied to Buyers` Cash at Closing amount in Section 4.4. Section 6.2.1 shall apply in the event the appraised value comes in below the stated listing price at the time the offer was submitted.”
*can be any dollar amount above appraisal.
One of the agents that called asked a great question about this clause. “Isn’t it implied when a buyer is bringing more down that they will restructure their loan to accommodate a lower appraisal and bring money to cover that that gap?”
Short answer: NO. In a more balanced market, when an appraisal comes in lower, both parties usually agree to the appraised value. So, as a listing agent, I want the appraisal gap spelled out in the contract. If the appraisal comes in low, how much will the buyer bring above the appraised price?
Health and Safety Inspection: I have seen this written a number of different ways but in essence the buyer is saying they will only object to items related to health and safety. This clause is the hardest to enforce because everyone’s definition of health and safety is a little different. However, buyers should not go into the transaction thinking they will get cosmetic updates completed the seller at inspection objection.
The gold standard in a multiple offer situation:
An offer with an escalation clause, appraisal gap guarantees and an inspection for only health and safety (or taking the home as is).
Contracts written with this language are not new to our market, however, there are a few changes that I have seen. Mainly, the dollar amount is increasing. Buyers are no longer offering 5k above the appraised value, now its upwards of 15-20% of the list price. Appraisal objections are being waive completely as buyers are willing to make up the difference between the agreed upon purchase price and the appraised value. Inspection objections are being waived and buyers are agreeing to take the home “as is”.
This is a very tight market, making it incredibly competitive. It is imperative that both buyers AND sellers have an agent on their side that know how to navigate this market. Be sure to reach out to Liz for more information.
Liz is broker and owner of Liz Daigle Realty.