#learnfromreality // Price Escalation Addendum

When we purchased our house a few years ago, we entered into a bidding war. I've seen this scenario play out time and time again with my clients and knew what our options were. Dammit, we weren't going to get caught up in the emotional connection to this perfect-for-us property. But of course we did. We thought we didn't, but we did. 

We went in at asking price with an unusual accommodation of a 4 month settlement period and a lease back per the Seller's request. In addition, we decided to put in a Price Escalation Addendum (PEA). This can be an excellent tool to use when there are many offers and you want to stay in your comfort zone of what you'd like to pay. You submit your offer with the addendum that allows you, as the buyer, to automatically increase your offer by increments of your choosing, to beat competing offers, up to a specified maximum, if a higher offer is received. Prior to submitting the offer with the PEA, my husband and I talked in depth about what we were comfortable not only paying, but sustaining. I generated estimated closing costs at all price points and, after reviewing and consulting with our mortgage broker, we decided on a strategy. 

We waited for the fateful phone call from my colleague, the listing agent, which came the next day. Our offer was accepted! After digesting and celebrating that first sentence out of my colleague's mouth, I felt a twinge of nausea.

"At what price?"

"$5K over your original offer price."

I let out an audible sigh of relief. At that moment, it occurred to me. Had we won it at our specified max - one that WE chose - it would have been an uncomfortable stretch for us. Turns out my husband had the same reaction. It came as a huge surprise because we were SO sure that we would have felt OK.

Since then I've started asking my clients an important question in this similar situation:

"If you won the property at your maximum price, and woke up the next morning, how would you really feel?"

With the Main Line and other areas of the country experiencing lower inventory and a higher chance of multiple bids on a single property, you need to know how to best - and most realistically - strategize to win the home you want. And you need to be able to sleep well those subsequent nights knowing it will soon be yours.

#learnfromreality

1)  Consult with your real estate agent and mortgage broker or banker to determine what is fiscally possible when it comes to not only purchasing your house, but maintaining the payments on it.

2) Review estimated closing costs for various price points to understand what that looks like.

3) Determine a strategy for the escalation terms. This includes setting a maximum price, an increment amount, and what happens if/when there is a differentiation between the appraisal and accepted offer price.