Buying a home can be quite overwhelming if you’re unfamiliar with all the acronyms, verbiage and processes. Don’t worry – your Ville Team realtor will be right beside you through the full process. If you’ve already been looking for a home, you may have heard the terms “appraisal gap” and “escalation clause.” Let’s break each term down to see if these concepts might be a strategy for you to use as you put an offer in on your future home.
Appraisal Gap
An appraisal gap happens when the appraised value of a property is lower than the agreed-upon purchase price. In simpler terms, it’s the difference between what you’re willing to pay for a home and what a professional appraiser believes the property is worth. Your Ville Team agent may suggest including an appraisal gap addendum with the original offer stating that you, as the buyer, are willing to cover the gap up to a specified amount. This gap can cause issues during the financing process, as lenders typically base their loans on the appraised value.
Why does this matter? Let’s say you’ve made an offer of $350,000 on a home, but the appraisal comes in at $330,000. This $20,000 gap poses a challenge: you either need to bridge the gap with additional cash funds or negotiate with the seller to adjust the purchase price. Appraisal gaps can jeopardize deals or lead to renegotiations, which can be stressful for both buyers and sellers.
Escalation Clauses
Now, let’s talk about a clever move you can make to stand out in a competitive market – the “escalation clause.” Picture this scenario: there’s a house you’re eyeing, and you know it will sell quickly. Putting an escalation clause with your offer says, “If someone else bids higher, I’m willing to top that, but only up to a certain limit.”
Here’s an example: The house you want is listed at $380,000, and you suspect there’s a bidding war happening. You toss in an offer with an escalation clause saying you’ll beat any other offer by $2,000, maxing out at $400,000. If another buyer comes in at $385,000, your clause kicks in, and your offer climbs to $387,000.
Why Use An Appraisal Gap or Escalation Clause?
In a competitive seller’s market, where demand outpaces supply, multiple offers are common. An escalation clause can give you a competitive advantage without pushing your budget to its limit. On the other hand, being prepared for potential appraisal gaps ensures you have the financial cushion to cover any valuation discrepancies, allowing your deal to move forward smoothly.
Both strategies require careful consideration and negotiation skills. It’s crucial to work closely with your Ville Team real estate agent, who will guide you through the process and help you tailor these strategies to your specific situation and the current local market. Appraisal gaps and escalation clauses might sound complicated at first, but with this break down, you’ll be more confident when you submit the offer on your dream home.
Ready to find a home you love and put in an offer? Contact The Ville Team today.