Escalation Clauses

Currently, the Denver real estate market remains very tight with low inventory but buyers out in full force. This has been a constant theme for quite some time now in Denver and the tight real estate market continues to push home prices higher. Over the last four years this compression phase – where inventory hits incredibly low levels and prices rise – has lasted until mid-to-late March. Prices begin to level out in the summer months as more sellers enter into the marketplace. While competition is very high for a home we are seeing multiple offer situations as buyers bid for a home. Buyers try to put in not only the highest but best offer and two clauses seem to be winning multiple offer situations.

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.

The gold standard in a multiple offer situation:

An offer with an escalation clause and appraisal gap guarantee.

This shows you are serious about the home and willing to pay more if it were to appraise lower than the given purchase price.

Even though we continue to be in a tight sellers market here in Denver, there are still deals to be had. Always keep an open mind while looking for a home and consider looking at homes that do not have professional pictures or have been on the market for longer than a week. This typically can mean there will be less competition. If you do find yourself in a multiple offer situation, keep in mind these clauses that are being employed in this market.

Liz is  broker and owner of Liz Daigle Realty.

Please follow and like us:
Follow by Email

Leave a Reply

Your email address will not be published. Required fields are marked *