This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: What are closing costs in a real estate transaction? Who pays closing costs in a home sale and which terms are negotiable?
Answer: When it comes to budgeting for a home purchase or sale, you’ll also need to plan for closing costs, which are due at settlement day.
Closing costs vary by state and locality, but it is customary in Virginia, D.C. and Maryland for each side to cover the taxes and fees associated with their portion of the transaction and the seller to pay the commission to both the broker/agent representing them and the broker/agent representing the buyer.
Sellers pay about .25% of purchase price, plus the commission they’ve agreed to, in closing costs. Buyers pay about 2.5-3% of purchase price in closing costs.
Here are the standard closing costs on each side of a home sale for transactions in Fairfax. Virginia:
Sellers
All of the fees listed below are automatically deducted from the buyer’s payment so you do not pay any of these out-of-pocket, except for the resale package if your home is part of an HOA or Condo Association.
Commission: Sellers traditionally cover the commission for their representing broker/agent and offer a commission to the buyer’s representing broker/agent.
Title Fees: This covers the legal review and preparation of the sale documents and usually runs about $500-$1,000.
Transaction Taxes: The seller pays a transfer tax to the state, also known as the VA Grantor tax.
Prorations: You may owe or be credited for property taxes or HOA/Condo fees, based on the status of your tax payment.
Resale Package: If your home is in an HOA or condo building you are required to provide the buyer with a resale package including by-laws, reserve balance, Association inspection, etc. This fee varies by community but is usually $100-$300.
Buyers
All of the fees/taxes listed below are included in your costs due at closing, except the appraisal, inspection costs and in some cases a condo questionnaire, which are all paid out-of-pocket while you’re under contract.
Lender Fees: This includes the cost of processing your loan, any points paid to reduce your interest rate, appraisal cost and any other lender-related costs. These costs often total at least $1,000-$2,000+, plus any points purchased to bring down your rate.
Title Fees: These charges include lender-required title insurance, optional buyer’s title insurance, deed preparation, title abstract search, land survey and other general processing fees to prepare the legal and administrative side of your purchase. These costs usually cost $500-$1,500, plus the cost of title insurance (if required and/or opted for), which is usually about .25-.75% of purchase price.
Transaction Taxes: You’re responsible for a handful of state and local taxes, some fee-based like the deed recordation fee and others are a percentage of the purchase price like the state and county transfer tax. Expect to pay roughly .5-.75% of purchase price in Government fees and taxes.
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: I’m looking to purchase a home that’s walking distance from the metro station. What are my housing options and what neighborhoods do you recommend around the Vienna Metro Station?
Answer: Vienna Metro Station is the last stop on the Orange Line. The station is in Oakton, in the median of Interstate 66 at Nutley Street (Virginia State Route 243) which provides quick access to 495 and can take you to D.C. in 25 minutes. You can get to Dulles Airport in 20 minutes. Overall, a great location!
The communities around the metro are beautiful and offer many housing options. It’s a mix of original homes and new construction; condos and large homes. The area is very walkable with lots of green spaces, and it tends to be quiet during the weekends.
What’s Great About The Neighborhood
Location — The Vienna Metro is located minutes away from Tysons. Depending on which side of the metro you are, you could walk to Pan Am Shopping Center. It’s less than 2 miles from the upcoming mixed use development Scout on the Circle, which will have small shop retail, and a 54,000 sq. ft. Giant Food.
It’s also less than 3 miles from the Town of Vienna and all its amenities. (Check my past column about Town of Vienna)
It’s only a 5 minute drive to the thriving Mosaic District, offering many options for dining (True Food and B Side are some my favorites!), shopping, fitness and entertainment.
Active Community —Â The Providence Community Center is just steps from the metro and it provides the residents of all ages various fun activities such as Yoga, crafts,and chess club. Here’s the full schedule.
There are parks within walking distance such as Nottoway Park, offering tennis, basketball and volleyball courts, gardens, picnic areas and wooded nature paths.
If you have a dog, you can walk to Moorefield Park. The play area is shaded by mature trees and completely fenced in, providing a cool and safe retreat for dogs and their families. Water is available on site as well. All dogs must be licensed by the Town of Vienna or Fairfax County.
Housing
There are many different options for detached homes, townhomes and condos. If you’re interested in new construction, check out my column about Metro West.
Within 1.2 miles from the metro, there are 66 properties for sale, ranging from a one bedroom condo for $179,900, to a brand new 6,000 sq. ft., 5 bedroom single family home for $2,295,000. You can see the active listings here.
Twelve properties are under contract, ranging from a 1 bedroom condo at $195,000, to a new custom built, 6 bedroom single family house at $1,449,900.
In the past 6 months, 86 condos were sold for a median price of $327,500; 110 townhouses were sold for a median price of $549,000; and 71 single family homes sold for a median price of $815,000.
I visited some active listings in the area, and the nearest to the metro is a 2 bedroom condo, located at 2971 Centerboro Drive #379 (Courtesy of RLAH Real Estate).
Here’s a little video tour for you:
If you’d like more information, or would like a question answered in my weekly column, please reach out to [email protected]. I hope to hear from you soon.
Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 703-390-9460.
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: I am interested in remodeling my home to better suit my family’s current lifestyle and taste. How much should I consider resale value over our personal preferences?
Answer: I often say that the best way to ensure your home is a good investment is to find one that will suit you for a long time. Market appreciation and local development are never guaranteed, but eliminating one or two real estate transactions from your lifetime is a guaranteed way to generate value. This is why many homeowners take on major remodeling projects instead of moving to a new home.
Major remodeling projects often cost well into the six-figures so homeowners rightly question resale value. To provide an insider’s opinion, I reached out to Caroline Goree ([email protected]), a Project Leader with BOWA, a local Design Build firm that specializes in luxury renovations from kitchens to whole-home remodels.
In Caroline’s role, she works almost daily with her clients from the design consultation through construction so she is intimately familiar with the challenges homeowners face when choosing between resale value and personal preference. The following is courtesy of Caroline:
Renovation Expert Advice
As a Project Leader, I am part of the remodeling process from beginning to end and there almost always comes a point during the design phase when clients ask “Will I ever get a return on my investment?”
How often do you buy a new pair of shoes or new tech and consider its return on investment? Taking on a major renovation allows you to stay in your neighborhood, extend the time you live in your home, and customize to your lifestyle. Some of these bonuses won’t show up in a financial model, so it’s important to remember that return on investment can be about more than money (like the one year old iPhone you just replaced with a newer iPhone).
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: We are under contract for a property in Falls Church and the home didn’t appraise for the purchase price. What are our options?
Answer: Don’t panic! Low appraisals are a common side effect of a seller’s market. Appraisals are largely based on comparable home sales that closed prior to the home you’re buying. When there is a limited number of units that have sold and the market is hot, appraisers might have a harder time coming up with a home value that keeps pace with a hot market.
But First, What’s An Appraisal Contingency?
A home appraisal is an impartial professional opinion of how much a home is worth. In a property sale transaction, an appraisal is used to let the lender know that the contracted sales price is supported.
An appraisal contingency protects buyers if the appraised value is less than the price they’ve agreed to pay for the property and gives them the right to renegotiate the sales price with the seller, or withdraw from the contract without a penalty if buyer and seller don’t come to an agreement.
Your mortgage lender cares about the appraisal only to the extent it affects the loan-to-value ratio. A low appraisal does not mean the lender won’t lend. It means the lender will make a loan based on the ratio agreed to in the contract at the appraised value.
When Is It Okay To Waive The Appraisal Contingency?
I don’t often recommend waiving the appraisal contingency, but in some unique situations it could be considered an option:
- Buyers competing with multiple offers might choose not to include an appraisal contingency in their contract to make their offer more attractive to the seller. Buyers must be financially prepared to cover any difference between the sales price and appraised value.
- For an all-cash buyer, an appraisal is not required but it’s entirely up to the buyer to have one.
Most Common Reasons For Low Appraisals
- The market is moving too quickly —Â In areas where homes are selling rapidly, with multiple offers and increasing prices, it may be difficult for the appraiser to keep up with them as the appraisal process compares recent past sales.
- Bad comps — Bank owned, foreclosures and distressed properties bring down the value of the subject property unless an appraiser adjusts for marketing conditions.
- Improvements are not always as valuable as you would expect —Â No matter how nice, the appraiser won’t value the improvements significantly higher than the same improvements in the other homes in the area.
- Lack of local market knowledge —Â The comps the appraiser uses may be in an area that is not as pleasant or desirable as where the subject home is, which can negatively impact the appraisal value.
- The property is priced incorrectly — A common saying in real estate is that a property is worth whatever someone is willing to pay for it. While some would argue that you should never pay more for a home than what it’s worth, it’s important to remember that appraisals are merely opinions of value. This is where your agent is especially helpful and he understands what the market is doing and can clarify your options so you can make the best decision for that moment.
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: My family and I are moving to Northern Virginia this fall. Can you tell me more about McLean?
Answer: McLean is located between Vienna and George Washington Parkway. It is an affluent community and it’s home to the headquarters of the Central Intelligence Agency as well as the residences of many diplomats, members of Congress and many top-ranking government officials.
Here’s what I like about the neighborhood:
Great Location
McLean is about 8 miles from D.C., and it borders Arlington, Falls Church and Tysons. It is located just minutes away from 495, GW Parkway and the Dulles Toll Road.
Although the most convenient way to commute in McLean is by car, there are many public transportation options available. You can travel within the city by Metro, or bus. There is a McLean Metro station with the silver line going to Reston, D.C. and all the way up to Largo, Maryland.
Things To Do
There are great dining options in McLean. A few of my favorite restaurants are: Amoos Persian Fusion (everything is delicious but their saffron ice cream is amazing!), J. Gilbert’s Steakhouse (great Sunday brunch) and Tachibana Japanese Restaurant.
If you’re looking for shopping and entertainment, Tysons is only a few minutes away and it offers many options. Being one of the top shopping centers in the country, it has everything you need from movie theaters, to shopping deals, trendy restaurants and free concerts.
You have the luxury of many outdoor adventures with the convenience of having them in your own backyard. You can spend a full day enjoying the beautiful scenery and falls in 800 acre Great Falls Park, which allows activities such as bicycling, boating, rock climbing, fishing and hiking. Or check Scott’s Run for a nice hike, picnic and waterfalls.
Active Community
The McLean Community Center provides a sense of community for residents by furnishing facilities for civic, cultural, educational, recreational and social activities. They will host the McLean Fourth of July Fireworks at Langley High School and they’ll have food trucks and a DJ.
The McLean Farmers Market is one of 10 farmers markets run by the Fairfax County Park Authority. All products are grown or produced by the vendors and come from within 125 miles and The Fairfax County Master Gardeners Association will be there each week, providing horticultural information to home gardeners in Fairfax County.
For more community events, see the calendar here.
Housing
Properties in McLean are mostly single-family homes, but there’s also different options for townhomes, and condos. Here you can find all active listings:
- Active Condos
- Active Townhomes
- Active Single Family Homes
In the past 6 months, 133 condos were sold for a median price of $365,000; 38 townhouses were sold for a median price of $799,000; and 272 single-family homes sold for the highest price being $6,390,744, and the lowest price being $615,000.
Wishing everyone a safe and wonderful 4th of July!
If you’d like more information, or would like a question answered in my weekly column, please reach out to [email protected]. I hope to hear from you soon.
Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 703-390-9460.
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question:Â I’m hoping to purchase a home this year and I’d like to know, how does a Home Inspection Contingency work and what’s reasonable to expect from the seller?
Answer: Most sales contracts include an Inspection Period for buyers to conduct various inspections of their choice on the property. Depending on how the contract is structured, buyers may have the right to negotiate for repairs or credits based on the findings and/or the right to terminate the contract.
What Is A Home Inspection?
Shortly after ratifying (signed by both parties) a contract to purchase a home, most buyers will (read: should) hire a third party inspector to inspect the entire home and produce a report of any issues, from foundation cracks to missing door stops.
Unless you’re buying a new home, you should expect the inspection to turn up at least a handful of items that you or the seller should address.
In most cases, the contract to purchase is contingent on the home inspection, meaning the buyer has the right to ask the seller to fix or replace anything and/or provide a cash credit to the buyer at closing. If the buyer and seller are unable to come to an agreement on these requests, the buyer has the right to void the deal.
What Should You Look For?
The goal of an inspection is to ensure that the seller is delivering the property in the condition both sides expected while negotiating the sale price. Generally, you can divide findings into big-ticket items that impact the value of the home and must be addressed and smaller punch-list items that shouldn’t cause much friction. The big-ticket items I look for during an inspection are:
- Structural flaws
- Water penetration
- Safety hazards
- Inoperability (e.g. air conditioning not working)
System Life Expectancy
You should also determine the age of major systems like the roof, windows, HVAC and water heater prior to making your offer, and verify these are accurate during the inspection. Make sure you’re clear on the expected life expectancy of these systems while you’re negotiating the sales price and factor this information into your offer.
You’ll have a tough time convincing most sellers they’re on the hook for crediting you the cost of a 17-year-old water heater if that information was made available prior to your offer, assuming the system is working.
What Should You Ask For?
You’ll generally be deciding between asking the seller to repair or replace something or asking for them to provide a credit at closing. Often times an inspection agreement includes both — a credit for some items and a request to fix/replace others. Sellers must use licensed contractors and provide works receipts for any work they do.
In general, if something you’re asking for involves personal preference or you want to have control over the quality of the result, it’s best to ask for a credit and handle it yourself.
For example, if the deck is falling apart and needs to be replaced, you don’t want the seller managing the design and construction of a new deck so ask for a credit for the replacement cost and make sure you’re getting the deck you want.
Additionally, if the A/C system needs to be replaced and the seller has a mid-grade system, but you’d like to install a top-of-the-line A/C system, it’s best to request a credit equal to the replacement cost for a comparable mid-grade system and invest in the extra cost of a nicer system yourself.
Inspections Don’t Need To Be Contentious
Inspections are one of the most common points of contention between buyers and sellers, but with the right preparation and expectations going in, it can be a smooth process that both sides are happy with.
Like the negotiations you had on the sale contract, the inspection period is also a negotiation.
If you’d like more information, or would like a question answered in my weekly column, please reach out to [email protected]. I hope to hear from you soon.
Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 703-390-9460.
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: Can you tell me about some of the walkable neighborhoods you suggest living in around Tysons?
Answer: Tysons is more than a corporate district, or an upscale shopping mall. It’s a well-rounded neighborhood because it offers residents a suburban feel while gradually turning into a mixed-use urban city. Tysons is constantly changing, and I truly believe that it’s a great place to live, work and have fun.
Here are the top reasons that make Tysons an awesome neighborhood:
Location
D.C. is a 30 minute drive away; Fairfax, Arlington and Dulles Airport are roughly 20 minutes each. There are 3 Metro stations nearby (Tysons Corner, Greensboro, and Spring Hill) with the Orange and the new and expanding Silver line. Tysons is located off of 495, just a few minutes away from I-66, Route 7 and Dulles Toll Road.
Things To Do… Other Than Shopping
Of course shopping is fun and Tysons has the best! But if you think that’s it, you’re wrong.
Tysons has a great variety of international restaurants. From upscale Eddie V’s, and Nostos (amazing Greek food), to quick bites such as Super Chicken, to Leid Poke. The list is endless!
Tysons has great happy hour. All those corporate employees need somewhere to wind down after a long day at work so it’s a nice place to network and meet people who are career driven.
With the construction of The Boro, Tysons will be a more walkable neighborhood. Their signature park, Boro Park, will be over an acre of green space and will host different events, such as outdoor concerts, movies on the green, markets and festivals. Surrounded by retail, office, restaurants and a movie theater, the park is active day and night.
There are many dog park options, and if you’re outdoorsy you are just minutes away from Wolf Trap Foundation for the Performing Arts, Great Falls Park for hiking and amazing views, and a 45 minute drive to the mountains.
Housing Options
There are different options from detached homes, townhomes and condos. Within a mile radius from Tysons there are currently 63 properties for sale (including newly built condos at Verse, the newest building in The Boro), ranging from a one bedroom condo for $260,000, to a $2M 8 bedroom newly built Craftman home.
You can see all active listings here.
There are 47 properties currently under contract, ranging from a one bedroom condo at $230,000 to a 2 bedroom penthouse at $2.7 million.
In the past 6 months, 89 condos were sold for a median price of $352,500, 13 townhouses were sold for a median price of $689,000 and 19 single family homes sold for a median price of $891,000.
What’s In The Future
By 2050, Tysons will be transformed into a walkable, sustainable, urban center that will be home to up to 100,000 residents and 200,000 jobs. Tysons is envisioned to become a 24-hour urban center where people live, work and play; where people are engaged with their surroundings; and, where people want to be.
Fun Facts
Some of the big names that have stablished their headquarters in Tysons include Capital One, Cvent, Freddie Mac, Gannett, Hilton Worldwide, Primus Telecom, Space Adventures, Sunrise Senior Living and USA Today.
A water shortage problem in Tysons will be very unlikely thanks to several reliable sources. Flowing through the community are Wolftrap Creek, Moomac Creek, Old Courthouse Spring Branch and Scott Run, which is a tributary of the Potomac River.
If you’d like more information, or would like a question answered in my weekly column, please reach out to [email protected]. I hope to hear from you soon.
Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 703-390-9460.
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: We are buying a home in a few weeks and one of the closing costs is an optional $1,500 for title insurance. Do you recommend buying title insurance?
Answer: Yes, I do recommend buying title insurance. It’s a one-time fee that protects your ownership in what is likely the most valuable asset you own and you cannot decide to add title insurance in the future.
I asked David Cartner, an attorney with Highland Title & Escrow, to provide a full explanation of the benefits of title insurance and some examples of when it would be used. Take it away David…
Do You Really Need Title Insurance?
It depends on what level of risk the buyer is comfortable taking. If a buyer does not purchase title insurance, he/she risks losing the entirety of the investment.
Why, then, do buyers question purchasing title insurance when the risk of loss is so high? I believe the reason is twofold: (1) buyers do not understand the benefits of purchasing it, and (2) title insurance is unlike other types of insurance in that it covers issues that have already happened.
What the buyer is hedging for are the unknown or hidden hazards that might jeopardize his or her ownership in the home.
Hidden hazards may include:
- Liens that were not revealed in title exam or made known to settlement agent prior to closing. A title exam reveals any liens on the property which need to be paid off and released prior to closing. If the title examiner overlooked a judgment, tax, or mortgage lien on the property or failed to note it in the title exam, the buyer would be liable to pay the lien incurred by the previous owner.
- Boundary line issues that an accurate survey would not reveal. For example, if a survey failed to note that a neighbor’s shed encroached on the purchaser’s property, title insurance would cover the cost of removing the shed and resolving any accompanying boundary line dispute.
- Forgery or lack of authority. If there was a forged signature on the deed in the chain of title, or a person or corporation signed a deed without authority to do so, the transfer of ownership to the buyer would be in question.
- An unknown heir of a previous owner came forth to claim ownership in the property. For example, suppose a seller passed away and his three children sold the house to a purchaser. If an unknown fourth child later came forth to claim his quarter ownership in the house, the purchaser’s title to the property is in jeopardy.
- Instruments executed under an expired power of attorney.
- Building permit violations. An enhanced version of title insurance is available that covers existing building permit violations. If a previous owner never obtained the appropriate building permits when remodeling a kitchen or bathroom or building a deck, enhanced title insurance would cover the cost of obtaining the appropriate permits.
- Mistakes in the public record at the county in which the property lies.
While lenders mandate that owners purchase lender’s title insurance (which only protects the lender’s interest in the property), homeowner’s title insurance is completely optional. It is a one-time fee that covers the owner for life.
Though there are certain factors that decrease the risk of an existing title defect, like having fewer previous owners of the house, a typical subdivided lot, or a recently constructed house, a buyer takes title to a house never knowing what title defect may already exist.
In this respect, title insurance is unlike other types of insurance in which the purchaser can mitigate risk.
Contact David Cartner (703-760-3300 or [email protected]), Settlement Attorney at Highland Title & Escrow, with further questions regarding title insurance or the real estate settlement process.
If you’d like more information, or would like a question answered in my weekly column, please reach out to [email protected]. I hope to hear from you soon.
Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 703-390-9460.
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: I work in Tysons and often drive through the Town of Vienna. How’s the housing market in Vienna and what it’s like living there?
Answer: Vienna is a suburban neighborhood located about three miles from Tysons. The Town of Vienna has been changing and improving over the past years while still maintaining its original charm and “small town” feel. It’s beautiful, full of friendly people and rich with life.
Here’s What Makes Vienna A Great Place To Live:
Location —Â It’s located minutes away from Tysons. It has its own Metro Station (last stop in the orange line) with 2 large parking garages, and it is located just a few minutes away from I-66 which provides quick access to 495 and can take you to D.C. in 25 minutes. You can get to Dulles Airport in 20 minutes. Overall, a great location!
Active Community — I lived in Vienna for a few years and I loved the great community atmosphere. The town holds parades and festivals throughout the year on Maple Avenue and Church Street. Viva Vienna! and Oktoberfest are my favorite. Here’s the full calendar.
There are parks and community facilities to meet citizen’s recreational needs. The Vienna Community Center is under renovation but it will reopen this fall.
Cyclists can take the W&OD Trail, a 45 mile trail that goes from Shirlington to Purcellville. Located right off the trail, you’ll find Caboose Tavern serving great beer made on site and delicious bites.
We can’t forget the amazing Wolf Trap for outdoor concerts! And of course, there’s a dog park.
Shops and Restaurants — Perfect place for foodies!
Must try: Taco Bamba (2 tacos and a draft for $12, yes please!), Yama (Sushi), Red Galanga; Vienna staples like The Vienna Inn, and Amphora; Date night places like Bazin’s on Church, Maple Ave (awesome brunch, and check their daily specials), and Clarity.
The Pear Tree Cottage, my favorite shop for antiques and design, has been in business for 5 years and it contributes to the community’s charm. There’s Bard’s Alley for books (and café and wine bar); and Whole Foods with the best fresh seafood selection. Vienna truly has it all.
This regularly-scheduled sponsored Q&A column is written by Val Sotillo, Northern Virginia-based Realtor and Falls Church resident. Please submit your questions to her via email for response in future columns. Enjoy!
Question: What is an Escalation Addendum and when should I use it?
Answer: Â With so much competition for hard-to-find homes that have just come to market, it’s critical for buyers to understand the purpose and risk/reward of using Escalation Addendums (EA) in their offer.
An EA allows you to make an offer at a starting price while agreeing to increase your offer to a higher price if another offer is higher than yours. It includes a maximum escalation value and an escalation factor, the amount your offer will increase by, over the next highest offer.
The contract allows for the seller to execute a purchase contract (ratify) at an escalated value, without the buyer having to agree to the new price. However, to protect buyers, the seller is required to deliver the next highest contract that was used to escalate your offer.
That other offer must also be materially similar, meaning the other offer cannot include seller credits or a material difference in contingencies (e.g. the other buyer has to sell a home before buying this one).
EAs carry a lot of risk and reward, so be sure to understand them before including one in your offer.
Understand The Risks
The obvious risk in using an Escalation is that buyers are exposing their maximum purchase price and some sellers may ask for that max, regardless of whether or not another offer allows them to get there contractually. There are strategies buyers can use to prevent a seller from doing this and, in my experience, most sellers use Escalations as they’re meant to be used.
The other not-so-obvious problem is with non-financial differences between two contracts. The Escalation Addendum says nothing about differences in settlement date, contingencies and other non-financial terms that make a material difference between contracts (e.g. no Home Inspection Contingency vs full Inspection Contingency is treated equally in the Escalation Addendum).
When To Use An Escalation Addendum
Escalations are best used when there are multiple confirmed offers and the seller has set a deadline for “best-and-final” offers. It’s important for buyers to establish expectations with the seller before they include an Escalation Addendum to maximize the benefit and reduce the risks.
This is where having an experienced agent working for you can be the difference between making a smart decision and irresponsible one or securing a home and helping somebody else secure it.
Proper Communication Is A Win-Win
I strongly believe that with proper communication between sellers and buyers, Escalation Addendums benefit both parties by allowing the seller to draw out the highest available price for their home and allowing buyers to confidently maximize their chance of securing a home. Improper communication leads to a lack of trust and a lack of trust will almost always earn sellers less and may keep the most motivated buyer out of the home of their dreams.
It’s Not Always About Price
Being the winning offer amongst multiple offers isn’t always about price. Buyers need to focus on non-financial terms as well to set themselves apart and it’s important to understand how you can increase the strength of your offer without taking on excessive risk, but that’s a topic for another day.
If you’d like more information, or would like a question answered in my weekly column, please reach out to [email protected]. I hope to hear from you soon.
Val Sotillo is a licensed Realtor in Virginia, Washington D.C., and Maryland with Real Living At Home, 2420 Wilson Blvd #101 Arlington, VA 22201, 703-390-9460.
