What You Need to Know About Appraisal Escalation Addendums

01 Jun What You Need to Know About Appraisal Escalation Addendums

Real estate terms can be very confusing. One of the terms that is important to familiarize yourself with is appraisal escalation addendums. An addendum is added to a contract to specify terms in Illinois real estate offers. In the case of an appraisal escalation addendum, it allows the buyer to adjust their offer to suit the appraised value of the home. 

In today’s blog post, we review what you need to know about appraisal escalation addendums.

How Does an Appraisal Escalation Addendum Work?

When a buyer puts in their offer, they include a price. In the case of the appraisal escalation addendum, the buyer agrees that they will pay more money if the property is appraised below the purchase price. In the case where an offer is made for $200,000 and the home is appraised for that amount, nothing is adjusted. However, if the house is appraised for $195,000 then the buyer will pay above the appraised value to secure the home. While it may not sound that it makes sense to do this, it does make the offer more appealing to the seller. This is a strategy some buyers use to ensure they get the home they desire.

Common Issues with Appraisal Escalation Addendums

Issues may arise when you include an appraisal escalation addendum:

1. The Appraisal Comes in Below the Purchase Price and Buyer Must Pay Out-of-Pocket 

In this case, it could mean the buyer now has to pay more than the appraised value. The only way to avoid this scenario is to ensure that the addendum states that should the property not appraise for the agreed full purchase price, the buyer will only pay a certain amount over the appraised value AND that the final purchase price won’t exceed the contract price. Instead, the amount paid would only be enough to meet the purchase price.

Either way you slice it, the buyer will have to agree to pay a certain amount above the appraised value out-of-pocket. This is true even if the buyer agrees to waive the appraisal altogether. 

2. Loan Term Confusion 

Buyers sometimes misunderstand the terms of the loan–it’s based on the appraisal value only and not the contract price. 

In a hot sellers market, an appraisal escalation can be a useful strategy to win a bidding war, but it’s important to be mindful of the pitfalls of coming up with the funds out-of-pocket, or, if the market turns, you can find yourself underwater pretty quickly. 

Advice from a real estate attorney will ensure you have the proper wording and caveats to avoid issues.

The Real Estate Attorney’s Role

When it comes to addendums, a real estate attorney is the best professional to ensure any exceptions are expressed clearly. They will consider the implications of something like an appraisal escalation addendum and anticipate possible problems. The wording will then reflect those issues, providing a way to resolve them. If the wording in the addendum is unclear, it then becomes difficult to enforce.  

As you can see, an appraisal escalation addendum should be designed to address common issues that arise during an appraisal. An experienced attorney will know how to include the proper wording to reduce risk.

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