Escalation Clause, As-Is Counter, and Appraisal Gap
Buyer submits a written offer at $612,000 with an escalation clause to $632,000 in $2,000 increments, 20% down conventional financing, a 10-day inspection contingency, a 30-day financing contingency, and no appraisal contingency. Buyer has $140,000 cash for down payment and closing. Seller counters at $628,000, 'as-is,' with a 15-day closing and no seller repairs. Buyer's agent estimates closing costs at $9,000 and believes the appraisal will be $590,000. The counter is signed by seller and delivered to buyer.
1. Is there a binding contract after the seller's counter, and how does the escalation clause apply?
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The seller's counter at $628,000 is a counteroffer, not an acceptance. It terminates the original $612,000 offer. No binding contract exists unless and until the buyer accepts the counter in writing and delivers acceptance. If the buyer accepts, the escalation clause is irrelevant because the original offer is gone; the contract price is $628,000, as-is, with a 15-day closing.
2. How would the escalation clause have operated if the seller had accepted the original offer?
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If the seller had accepted the original offer, the escalation clause would raise the price only if the seller produced a bona fide competing offer meeting the clause's terms and proof requirements. With a $620,000 competing offer, the buyer would pay $622,000, not automatically $632,000. The clause must require written proof; otherwise it is ambiguous or unenforceable. It does not create a bidding war by itself.
3. Quantify the appraisal-gap risk at $628,000 and advise the buyer.
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At $628,000, 20% down is $125,600 and the planned loan is $502,400. If the appraisal is $590,000, the lender will lend at most 80% of $590,000 = $472,000. The buyer must bring $628,000 minus $472,000 = $156,000, which is $30,400 more down payment than planned. With $140,000 cash, the buyer is short at least $16,000 before the $9,000 closing costs, so the deal cannot close as structured unless the buyer adds cash, renegotiates price, or obtains a different loan. Waiving the appraisal contingency shifted that risk to the buyer.