What Are the Challenges of Buying a Historic Home?


Home is where the heart is, so the saying goes. For many, that means a personal connection with a home and community. That often entails buying a home in a historic neighborhood. Buyers want to be located in a historic part of the city and have a home with unique features like carved moldings, custom fireplaces, and vaulted ceilings.

In some older cities, homes can date back to the 17th century, but often, historic homes were built in the late 19th or early 20th century. Historic homes are registered with the National Register of Historic Place, and they are deemed historic or “architecturally significant” if they exemplify a certain architectural style, demonstrate the essence of a certain period in history or are associated with a famous person.

Historic DIstrict SignHistoric DIstrict Sign

Located in a Historic District

When you consider the purchase of a historic property, you first need to determine if the home is located in a historic district. The United States has 2,300 local historic districts, and those districts place specific regulations on modifications to the property. Before you buy, you need to determine the rules that govern the district. Often times, a historic review board must approve any renovations to the property. The goal is to preserve the community’s historic feel. You don’t want someone adding modern elements to the façade of a historic home.

There is much debate about whether buying a home in a historic district is a good financial investment. Some find the regulations burdensome, but others believe there is strong demand for historic properties that have been well preserved.

“I think buyers see a property in a historic district as a negative because it restricts what they can do,” says Paul Whaley, of Boston’s Coldwell Banker Residential Brokerage. “Investors don’t like it either as it takes longer for approvals. In general, I think it depresses the value of a property.”

However, some studies have proved otherwise. In 2011, a study was done of historic districts in Connecticut, and it concluded that property values increased 4% to 19% annually. A different study of properties in New York City found that values between 1980 and 2000 increase more significantly for properties in historic districts on a per square foot basis.

An Emotional Investment

For many, buying a historic property is an emotional purchase. Historic homes are unique and often have a great story. People feel an emotional connection to the property and the historic community. That is not necessarily a negative, but it’s important to acknowledge that the emotional connection exists. You want to fully realize any potential problems without making an unwise decision. Step back and give some distance when making a decision that has such an emotional investment; it will minimize the chance for buyer’s remorse after purchasing.

Expensive to Maintain

Historic homes by their very nature are old and generally more expensive to maintain than newer construction. Unless they have been updated, the sewer, wiring, and electrical systems can be a nightmare to maintain. Plus, there is always the chance that significant water damage has happened over a long period of time. To conduct maintenance in these areas,  you often need to hire a specialized contractor, especially if changes must be approved by a historic review board. That means living in a historic home can be an involved commitment and require a significant amount of financial resources.

Possible Lead Paint and Asbestos

Lead paint and asbestos used to be common building materials in the United States, but they are now banned. When they are discovered in a historic home, you are often required to hire specialists to mitigate the problem. Lead paint and asbestos are both highly toxic substances, and you do not want them causing health problems to you or your family. You want to have them disposed of properly.

Historic Cape May HouseHistoric Cape May House

Mature Landscaping

Historic homes have been around for generations, and that often means the landscaping has been highly refined. Trees and shrubs are probably mature and well established. This might be an attribute that you desire, but it is something you need to be aware of when purchasing a historic home. You might have less ability to make major modifications to the landscaping.

Possible Tax Incentives

If you purchase a historic home, you might be eligible for tax credits for making modification and improvements. The federal government encourages people to purchase and rehabilitate historic structures and offers the Federal Historic Preservation Tax Incentives program. The program has helped preserve 44,341 historic properties since 1976, and has seen $96.87 billion worth of private investment. States and local communities also offer historic preservation tax credits. For example, Georgia offers a tax credit for 25 percent of qualified rehabilitation costs.

Financing and Insurance Can be a Challenge

Lending institutions often shy away from financing some historic properties, because they can be viewed as a higher risk. Lenders will often charge higher interest rates and fees when providing a mortgage for a historic property given the increased risk. As well, many historic homes do not qualify for a Federal Housing Administration loan guarantee. It’s a good idea to do your research before you make an offer on a historic home. You don’t want to get into the process and realize it will cost a lot more than you anticipated.

The same can also apply to homeowners insurance. Insurance companies want to limit their exposure, and they don’t want to have to pay to repair a historic home to its original condition. Unique architectural elements can be expensive to replace. Many times, insurance companies will want to have someone personally inspect the property before the policy is written. You will probably need to find an insurance company that specializes in covering historic properties, especially if the home is over 100 years old.

James Shea is an award-winning journalist and author. He owns Media Lab, a content marketing and search engine optimization company is Richmond, Virginia.


Source: homes.com

In the Market? Here’s What You Should Know About Contingencies

Home contingencies are aspects of home purchase contracts that protect buyers or sellers by establishing conditions that must be met before the purchase can be completed. There are a variety of contingencies that can be included in a contract; some required by third parties, and others potentially created by the buyer. While sellers in the current market prefer to have little to no contingencies, the vast majority of purchase contracts do include them, so here’s a primer to help you navigate any that come your way!

Financing Contingency

The most common type of contingency in a real estate contract is the financing contingency. While the number of homes that sold for cash more than doubled over the last 10 years, the majority of home purchases — 87% of them, in fact— are still financed through mortgage loans.

Why is this important? Because most real estate contracts provide a contingency clause that states the contract is binding only if the buyer is approved for the loan. If a contract is written as cash, in most cases, the financing contingency is removed.


Why Does The Financing Contingency Exist?

This contingency exists to protect the buyer. If a buyer submits a winning offer, but can’t get approved for a loan to follow through with the purchase, this clause can protect the buyer from potential legal or financial ramifications.

Tip: Homeowners can, and should, request to see a buyer’s prequalification letter before accepting their offer.

Home Sale Contingency

For many repeat homebuyers, they must sell a property in order to afford a new home. Whether they’re relocating for work, moving to a larger home, or moving to a more rural area, 38% of home buyers in a recent survey reported using funds from a previous home to purchase a new one. This is where a home sale contingency comes into play; this clause states that the buyer must first sell their current home before they can proceed with purchasing a new one.

Why Does This Contingency Exist?

This is another contingency that exists to protect the buyer. If their current home sale doesn’t close, this clause can protect the buyer from being forced to purchase the new home. In other words, they can back out of the new home contract without consequence. Keep in mind that in a seller’s market, this type of contingency offer is less desirable to sellers; in fact,  they may rule out your offer completely if this is included.

TIP: In many situations, homeowners can negotiate escape clauses for the home sale which would allow them to solicit other offers and potentially bump the current buyer out of the picture.

Home Inspection Contingency

Not only is it common, it’s also wise to include a home inspection contingency in any offer. Whether it’s a new home or an existing home, there is no such thing as a flawless house. Home inspections can uncover hidden problems, detect deferred maintenance issues that may be costly down the road, or make the home less desirable to purchase completely. A home inspection contingency essentially states that the purchase of a home is dependent on the results from the home inspection.


Why Does This Contingency Exist?

Whether it’s a roof in need of replacement or an unsafe fireplace, homebuyers need to know the maintenance and safety issues of the properties they’re interested in purchasing. If a home inspection report reveals significant (or scary!) findings, this protects the buyer from the financial burden that repairs would require. This is why agents will tell you it’s never a good idea for a home to be purchased without a home inspection contingency.

TIP: The findings from the report can usually be used to negotiate repairs or financial concessions from the seller.

Sight-Unseen Contingency

Especially during sellers markets, it’s not uncommon for a home to have dozens of showings within the first couple of days of listing. This breakneck pace can create a scenario in which homebuyers may not be able to coordinate their schedules to get a timely showing appointment. To help prevent missing out on the chance to buy a home, buyers in this situation will sometimes make offers on the home, sight unseen.


There’s no sugarcoating it…this is a high-risk strategy with ample opportunity for negative consequences. However, if this strategy is used, many real estate agents will add a sight- unseen contingency to their offer. This contingency states that the offer for purchase is dependent on the buyer’s viewing of, and satisfaction with, the property.

Why Does This Contingency Exist?

In a market with shrinking inventory, desperate buyers want a fighting chance at a hot property; in some cases, that can only exist by submitting an offer before they can see it in person.

TIP: Sight unseen offers are also high risk to the seller. If you include this contingency in your offer, try to keep other seller requests to a minimum. 

Why Contingencies Can Be Positive

In a seller’s market, buyers may feel the pressure to remove as many contingencies as possible in order to compete. But, it’s important to remember that contingencies are actually safeguards in place to prevent buyer remorse, expensive future repairs, or financial calamity. It’s always crucial for buyers to hire a seasoned real estate agent who can advocate for their best interests, negotiate and strategize in safe and competitive ways, and advises them of the risks of each decision.

Looking to Buy? Don’t Go it Alone!

The homebuying process is a complex one, but that doesn’t mean you’re left with all the heavy lifting. Find your dream home and a local agent on Homes.com, then visit our “How to Buy” section for all the step-by-step insights for a smooth process.

Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She’s passionate about the power of real estate. She’s also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

Source: homes.com

Austin-based Blogger Jesse Coulter Shares Nine Tips on the Homebuying Process

Buying your first home can be a daunting task, but it doesn’t have to be. Homes.com has partnered up with Jesse Coulter, a lifestyle blogger from Austin, Texas, to share her homebuying experience. While moving wasn’t in the question until her friend, and realtor, had sent her a listing, the ball got rolling soon after. With the help of her husband and three children for inspiration as to what their next home will include, the search began.

As Jesse and her husband continued house hunting, Homes.com was there to help them navigate the process. Shortly after, they found a home that was perfect for their growing family. However, Jesse realized that the homebuying process is a journey experienced by people everywhere and that the process can be long, confusing, and expensive for those who aren’t seasoned in purchasing a home. Jesse wants that to change.

Check out Jesse’s video below to hear her nine tips that help alleviate some stress during the homebuying process.

[embedded content]

Content Marketing Assistant at Homes.com | See more posts by this author

As Homes.com’s content marketing assistant, Sydney gets to combine one of her favorite pastimes with her job– keeping up with pop culture. Outside of work, she enjoys stepping away from her phone and computer and spending time with her friends, whether it’s just hanging out or traveling. Trying new foods, going snowboarding, and long road trips are some of her other favorite things to do, but what does she loves the most? When people read Homes.com’s blog articles, of course!

Source: homes.com

UFO-Shaped Palm Springs House (Once Owned by Bob Hope) Finally Finds a Buyer

The 23,000-square-foot steel, concrete and glass masterpiece that was once home to comedian/actor Bob Hope has finally found a buyer.

And that comes a huge win, as the spaceship-like mansion has been struggling for quite some time to find a new owner.

Initially listed in 2013 for a whopping $50 million, Bob Hope’s house in Palm Springs bounced on and off the market before settling for a $25 million ask.

What we don’t know is the final sale price, which has yet to be made publicly available (we’ll be keeping an eye out for that property deed though.)

Bob Hope house in Palm Springs. Image credit: Luxury Portfolio International

Unique Architecture, Signed by John Lautner

The modern structure is the largest home ever to be built by Hollywood’s favorite architect, John Lautner.

Known for combining cutting-edge tech with humane design and dramatic space-age flair, Lautner is the creative mind behind architectural masterpieces like the Elrod House, the Chemosphere, and the exquisite Silvertop home — all of which have made their Hollywood debut in movies like Diamonds Are Forever (007), The Simpsons, Less Than Zero.

The UFO-like home boasts architectural drama throughout, starting with the enormous natural boulder that juts into the living room, and peaking with a massive oculus cut out of the curved roof stretching above the courtyard.

Bob Hope house in Palm Springs. Image credit: Luxury Portfolio International
Bob Hope house in Palm Springs. Image credit: Luxury Portfolio International
Bob Hope house in Palm Springs. Image credit: Luxury Portfolio International
Bob Hope house in Palm Springs. Image credit: Luxury Portfolio International

More modern homes:

Is it Real? The Story Behind Tony Stark’s Insane Malibu Mansion in the Iron Man Movies
Rare Frank Lloyd House Hits the Market in Nevada; Asks $500K
Futuristic Duplex Fit for the Jetsons Hits the Market in Chelsea
Seattle’s Song House Comes with Picture-Perfect Skyline Views & A Beautiful Legacy

Source: fancypantshomes.com

How Being A Veteran Can Help in The Home Buying Process

There are currently 18.2 million veterans in the US and due to their selfless service to our country, there are many benefits designated for veterans. One of the highly popular benefits is a VA Home Loan which is designed to assist veterans with the home buying process. Purchasing a home is a large expense, and the down payment is often one of the biggest hurdles. If you are a veteran, it’s important to fully understand the benefits available to you as you begin the homebuying process.

No Money Down

One of the most appealing benefits of a VA Home Loan is that veterans can avoid any down payment when purchasing a home.  Nick Smallwood, a Sergeant in the 1/142 Field Artillery Brigade of the Arkansas National Guard and Branch Manager with Hancock Mortgage, says “The VA loan (depending on remaining eligibility) allows a qualified Veteran or currently serving service member to buy a home for zero down up to the county loan limit.” Regardless of the size or location of the home, veterans can avoid paying even a penny in a down payment which helps make home ownership easier for the 18.2 million veterans.

Avoid PMI

In addition to avoiding a down payment, another benefit of VA loans is no private mortgage insurance. PMI is typically required when a homeowner is putting less than 20% down on a loan. While veterans are putting less than the standard 20% down, VA loans eliminate the PMI, an additional monthly charge. By avoiding PMI, veterans can enjoy a more affordable monthly mortgage amount.

What You Need to Know About VA Loans

Most banks and lenders offer VA loans, so finding a qualified lender is not a difficult process. However, before you pick your lender, it’s important to know what questions to ask of your lender. According to Mr. Smallwood with Hancock Mortgage, borrowers should inquire about the following items:

  • VA doesn’t have a minimum credit score requirement. Instead, lenders set minimum credit scores. Ask your lender what their minimum credit score requirement is for VA loans.
  • There are specific requirements for VA home loans. Find a lender that knows how to read and interpret the VA Handbook 26-7 to ensure the property and loan meet the requirements.
  • Borrowers are required to obtain a Certificate of Eligibility. It is crucial that the lender or Veteran/Service member get the Certificate of Eligibility (COE) early in the process.
  • It’s important that the lender is aware of the duty status of the individual. Depending on whether you are still serving or discharged, will depend on what type of documents you will need.
  • Not all veterans are eligible for VA loans. Unfortunately, not all Veterans are eligible for the VA loan. Eligibility depends on time in service, and type of character at discharge (honorable, general, other than honorable, and dishonorable). Active duty, Reservist, And National Guard members could be eligible.
  • VA loans are not just a one-time benefit for veterans. Instead, you can use the VA loan over and over again, as long as you have enough entitlement. 
  • You can begin the VA loan process and home search on Homes.com.

Inquire About Other Veteran Benefits

There are many steps in the home buying process, and while veterans utilizing a VA loan can avoid paying a down payment or PMI, there are still other expenses. For example, home inspections can be a few hundred dollars or more. It’s important to ask the home inspector if they offer any military discounts. In addition, some moving companies offer military discounts as well.

Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She’s passionate about the power of real estate. She’s also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

Source: homes.com

Should You Use A Home Equity Line To Buy An Investment Property?

The lure of real estate investing has long since grabbed the attention of many people. The potential for wealth building, financial freedom, and retirement planning are all notable benefits of real estate investing. However, one of the trickiest parts of purchasing investment properties is financing. While there are multiple avenues & strategies available, often accumulating the cash needed for the initial investment is one of the biggest hurdles. One option available to alleviate this problem is a home equity line of credit, sometimes called a HELOC. Simply stated, a home equity line of credit is borrowing against the equity in your current home.

According to BankRate, “To figure out how much equity you have, subtract the amount you still owe on your mortgage from the value of your house. The difference is the amount of the equity, and part of that can be used as collateral for a loan.” Rather than sitting on the equity in your current home, a HELOC allows you to utilize that equity- in the form of purchasing an investment property, paying down outstanding credit, or financing home repairs. A HELOC can be a good alternative to traditional financing; however, it’s important to understand the full picture before cashing out the equity in your current home.

Should You Use A Home Equity Line To Buy An Investment Property?

HELOCS Are Not Traditional Home Loans

Unlike applying for a conventional or FHA loan, a HELOC is borrowing your current equity in your home.  You can borrow some or all of the equity in your home, and the specifics of the HELOC can vary bank-to-bank. According to Dawn Doebler, co-founder of Her Wealth & Senior Wealth Advisor at The Colony Group, “The interest rate is variable and you’re only charged interest on the amount outstanding…HELOCs can be a better choice than traditional loans for short-term projects or for unexpected cash needs.”

HELOCS Can Provide Access To Cash For Multiple Purposes

Again, unlike FHA, RD, or conventional loans, a HELOC can be used for more than acquiring real estate. Some people even utilize home equity to pay down substantial debt, finance a home remodel, pay for kids’ college education, or even finance long-term care. The flexibility that comes with a HELOC is attractive to many wanna-be investors, as they can avoid inspections & oversight that accompany construction type loans. However, it’s important to fully understand the bank’s fine print, requirements, payback schedule, and interest rate.

There Is More Than One Type

A HELOC is a home equity line of credit. However, there is another equity loan available: a home equity loan. According to Dawn Doebler, the primary difference is “A home equity loan is disbursed all at once in a lump sum at a fixed interest rate for a fixed amount of time, usually 10 years or longer. By contrast, a home equity line of credit is more like a credit card. The interest rate is variable, and you are only charged interest on the amount of the credit line that is outstanding.” Depending on your goals and timeline, one option may be better suited to your needs. It’s important to consult thoroughly with your lender to see which option is the best fit for you.

Read The Fine Print Before You Sign

As with any type of loan, there are risks. Knowing your financial capabilities and income forecast is crucial. In addition, knowing the specifics on the loan payback is also important. Most HELOCs are variable rates, and depending on the current rates, can either be good or bad. In addition, most home equity loans offer a certain time period in which the loan & interest must be paid. You also should understand that the with a HELOC or home equity loan, your home is being used as collateral in most cases to secure the loan.

Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She’s passionate about the power of real estate. She’s also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

Source: homes.com

Tim Ferriss Reportedly Puts Florida House on the Auction Block; Turns Out He Never Owned a House in Florida

Time for a little weekend fun.

Here’s the story: Realtor.com published an article on January 17 titled “Self-Help Guru Tim Ferriss Is Tired of Waiting for a Buyer, Puts Florida Home Up for Auction” (don’t bother looking it up, the article has since been taken down.)

In it, Realtor.com reported that productivity maven Timothy Ferriss — podcaster, entrepreneur, and best-selling author of “The 4-Hour Workweek” — got tired of waiting for a buyer to snap up his palatial Florida home and decided to put it up for auction.

The article — syndicated to news outlets with millions of readers, including SF Gate — reported that Tim Ferriss’ decision was driven by the fact that the property had been on and off the market since 2011, with asking prices gradually dropping over the years from $12.9 million to the current $7.2 million asking.

Now, here’s where the fun part kicks in: apparently, Tim Ferriss has never owned any property in Florida.

Alerted by his book agent, who read the article in SF Gate and sent it to Ferriss (apparently mocking him for his interior design choices — scroll down to see why), Ferriss took it to Twitter to clarify the whole ordeal:

With no harm done, Realtor.com was quick to take down the post, and all syndicated versions soon followed. And while we don’t know what made the Realtor.com editorial staff think this particular property belonged to Tim Ferriss, his Twitter followers were quick to point out that it looks nothing like one would imagine Tim Ferriss’ house — and more like one would picture Tony Montana’s house. See for yourselves:

1690 N Copeland Dr Marco Island
Image credit: Realtor.com
1690 N Copeland Dr Marco Island interior
Image credit: Realtor.com
1690 N Copeland Dr Marco Island pool
Image credit: Realtor.com

More real estate news:

$238 Million Sale of NYC Penthouse Shatters All Previous Records, Becomes the Most Expensive Sale in U.S. History
Paying Tribute to MLK’s Legendary Role in the Fight for Housing Equality
Once America’s Most Expensive Home, This Bel-Air Mansion is $100 Million Cheaper in 2019
These 8 Iconic Frank Lloyd Wright Buildings May Become UNESCO World Heritage Sites in 2019

Source: fancypantshomes.com

5 Ways to Win in a Purchase Money Market in the New Reality

During my recent conversations with sales leaders, managers across the board expressed concern about their originators adapting to the new environment of rising interest rates and the shift to purchase money.

Sherlock: not having an accurate view of sales performance is a recipe for disaster
Pat Sherlock

The decline in refinance business is a reality with mortgage applications dropping 43% in the last week, according to the MBA. This raises a critical question: how many lenders and originators will be able to transition to a purchase money marketplace when the easy money of refinancing is replaced by the hard work of finding customers who want to purchase and finance a home?

Every experienced mortgage lender has certainly witnessed big changes in interest rates over the last 20 years. Sometimes it happens quickly. Other times it can be a slow climb to higher interest rates. This time, it is a little of both. The global pandemic caused the Fed to drop interest rates to historic lows and now, with the end in sight, rates are inching back up.

The real question for lenders and originators that have 90%+ refinance business is: can they switch to the traditional purchase money market that still depends on local relationships or will they decide to sell out to other, better structured lenders? Frankly, the selling out strategy has likely already run its course, leaving lenders that have not invested in digital technology or sales training with few alternatives.

5 Steps to Success

That said, what changes should originators who have been living off of refinance lending make to succeed in a purchase money environment? Here are five recommendations:

  1. Develop a marketing plan. Yes, I know having a plan doesn’t seem like the right strategy when a loan officer is panicked and needs income. But, setting aside some time to analyze the market and identifying underserved opportunities is a worthwhile activity because where producers commit their time and marketing resources is always a balancing act. There are only so many hours in a day and spending them correctly matters a lot.
  2. Understand growth in the local area. An originator’s marketing plan should determine what home building activities in their local market are driving growth. Is it new construction, retirement homes, second homes, etc.? Every market is different and understanding where growth will be coming from is critical. Looking at the research the local municipality has already done is a good start.
  3. Identify underserved market opportunities and the people associated with them. Every market has underserved opportunities that some individuals have already recognized—you want to know these professionals. Rarely is an underserved market completely void of participants. An originator’s job is to develop relationships with the parties in the market before other loan officers decide to market to them. Building relationships takes time and requires originators to form relationships with builders, attorneys, real estate agents and other professionals.
  4. Don’t forget about previous customers. Since developing and building relationships is time-consuming, originators must also work their database of closed loans over the last several years. Former customers are already familiar with an originator’s service levels and a certain percentage might be interested in purchasing a second home or investment property. Some clients might be receptive to listening to a webinar on the latest trends in the local real estate market. This is a great opportunity for originators to partner with a realtor to target a particular audience. The real estate agent can provide his or her perspective as part of the webinar or live stream event. However originators reach out, they should avoid sending mass emails and direct mail. Consumers want a more personal, customized approach.
  5. Rekindle referral business. Originators who have a plan, determine their niche and develop relationships with referral sources and customers in an underserved marketplace are on the path to success in a purchase money environment. Working former customers is a smart way for producers to generate current business while establishing relationships with new referral sources.

Implementing all five strategies is a great way for originators to position themselves for robust performance in a purchase money market.

Pat Sherlock is the founder of QFS Sales Solutions, an organization that helps organizations improve their sales talent management and performance. For more information, visit https://patsherlock.com.

Source: themortgageleader.com

What To Know Before You Use An Escalation Clause In Real Estate

Some people might think the process of buying a home is as simple as finding the house you want and writing a good offer; however, as a buyer in a seller’s market, nothing is simple. Instead, things are often intense and multiple offer situations are common. Growing weary and frustrated, buyers and their agents have long looked for a way to stand out in the crowd during those multiple offer situations. One alternative that some agents employ is the use of an escalation clause. These optional clauses are inserted into real estate offers and might offer a buyer an advantage but there’s a lot more to these tiny clauses than meets the eye.

What To Know Before You Use An Escalation Clause In Real Estate

What Is An Escalation Clause?

An escalation clause, or escalator clause, is a method that allows the offer price to increase in desired increments. The purpose of using an escalation clause is to beat the other offers without overpaying for the property. The buyer’s offer is for a specified purchase price; however, an included escalation clause could increase the purchase price.

How Does An Escalation Clause Work?

If a home is listed for $200,000, a buyer can make an offer for $200,000. If they want to beat out any other offers, they might choose to include an escalation clause up to $10,000 over their offer price. These escalation clauses usually specify the increased increment amount and the cap in which they stop increasing their offer amount. For the $200,000 example, they may include a $2,000 incremental offer increase over the highest existing offer up to $210,000. In order for an escalation clause to be included, it must be specific & clearly state the cap amount a buyer is willing to pay and the amount of the incremental increase.

Serious husband and wife reading bank documents at home.Serious husband and wife reading bank documents at home.

What Should You Do Before Including An Escalation Clause?

First and foremost, if you are using a buyer’s agent to assist you in making the offer, it’s important they research if escalation clauses are even allowed by the state or local board. While some state or local Realtor associations still permit escalation clauses and even provide a separate document for them, not all provide that document. The issue of illegal practice of law has been brought up in association with escalation clauses, so a buyer and their Realtor might want to consult an attorney to draft the clause to avoid the legal risk. Finally, while it may be tempting to not offer more than you must by using incremental increases in escalation clauses, it does not always work in the best interest of buyers. Be cautious before you include an escalation clause in your next offer!

Why Aren’t Escalation Clauses More Common?

There are various reasons that using an escalation clause in an offer is risky business. While it may appear to be a smart way to win a bidding war, it reveals the max a buyer is willing to pay- much like showing your cards before you have to play them. There are also several legal issues surrounding escalation clauses. In fact, those gray legal areas have caused many local and state Realtor boards to ban the use of escalation clauses. Some of the gray legal areas surrounding escalation clauses include privacy issues, illegal practice of law, and ethical issues. The risk for a buyer using an escalation clause is that they may want proof that other offers exist that are higher than their original offer and therefore activating the escalation clause; however, the privacy and legal issues surrounding a buyer knowing the specifics of other buyers’ offers is an area of concern. According to Forbes Magazine, some sellers may choose not to accept an escalation clause.

If you’re looking to buy, rent, or sell, be sure to check out Homes.com’s step-by-step guides here, or browse thousands of listings on our website to find your next forever home!

Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She’s passionate about the power of real estate. She’s also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

Source: homes.com

What The 2020 Real Estate Market Could Look Like

Key 2020 Takeaways: 
  • Homeowners that are contemplating selling in the new year can realistically expect a stable market
  • We can expect to see more home buyers capitalize on the relatively low rates in 2020
  • As more homeowners opt to refinance rather than sell, this will play a contributing factor in the inventory shortage
  • Buyers that may have been out of touch with the market for several years, should prepare themselves to experience rejected offers, bidding wars, and longer than anticipated home search times

It’s no secret that the real estate market frequently sees pivots, changes, and even crashes. After surviving the recent recession, many homeowners and investors are paying close attention to the market and its changes. As trends and the economy changes, so does the real estate market, so what can we expect to see in the 2020 real estate market? Freddie Mac, a government-owned entity that backs mortgages, recently released their 2020 market predictions.

Home Sales Will Increase

As with each year post-recession, home sales will continue to increase according to Freddie Mac. Both new construction and existing sales will see an overall rise. In fact, Freddie Mac predicts that home sales will rise from 6 million (2019) to 6.1 million in 2020. Increased home sales are an indicator of a strong real estate market, and homeowners that are contemplating selling in the new year can realistically expect a stable market.

There Will Still Be A Lack Of Inventory

A common real estate theme post-recession is a lack of inventory, and 2020 will be no different. According to Forbes, part of this is fueled by homeowners attempting to recover lost equity from the recession, and another factor is longer homeownership tenures–including Baby Boomers. Of course, the lack of inventory pays a big factor in real estate prices and the fierce buying competition seen in parts of the country.

Home Prices Will Increase

Although many argue home prices are already outside the affordable range, Freddie Mac predicts an increase of 2.8% in home prices. While this may be unwelcome news for home buyers, this increase is less than Freddie Mac’s prediction for 2019 of 3.3%. As the inventory of available homes remains tight, the prices will tend to increase. In summary, the common factor of supply and demand will affect pricing in 2020.

Interest Rates Will Increase…But Slightly

The real estate market is already experiencing low-interest rates which has helped to spur activity in the market. And while Freddie Mac predicts interest rates will slightly increase to around 3.8%, this still remains within the realm of appealing interest rates. The increase is still a far cry from the days of 19% in the early 1980s, and it’s almost less than half of the highest interest rate pre-recession in 2006. Having lived through the recession, most home buyers are more cognizant of the power of a good interest rate, so we can expect to see more home buyers capitalize on the relatively low rates in 2020.

More Homeowners Will Refinance

According to Freddie Mac, approximately $789 billion refinance originations occurred in 2019. As interest rates remained low, homeowners, especially those experiencing high-interest rates from the pre-recession era, opted to refinance their current mortgages and stay in place. This will remain true for 2020; however, there will be slightly less in totally refinances originations for a total of $785 billion. Of course, as more homeowners opt to refinance rather than sell, this will play a contributing factor in the inventory shortage. If you or someone you know is looking to refinance in 2020, check out the Homes.com Mortgage Hub which has information on prequalifying or applying for a mortgage as well as a mortgage calculator. 

It’s Still All About The Millennials

Just about every industry is reiterating the power of millennials, and real estate is no exception. In fact, more than 25% of millennials, the nation’s largest generation, stated they want to purchase a home in 2020. As more millennials drive the market, the demand may be greater than the supply, therefore, increasing prices and competition. Sellers in 2020 would be wise to cater to the home buying demands of this generation as they’ve proven they’re willing to pay up for certain amenities and features in a home.

What This Means For Sellers

While low-interest rates, increasing demand, and limited inventory may all sound like great news for sellers, it’s important to remember one thing: you buy into the market you sell into. While a homeowner may be able to sell over list price due to increased demand and competition, they may also experience the same thing as a buyer. Buyers that may have been out of touch with the market for several years, should prepare themselves to experience rejected offers, bidding wars, and longer than anticipated home search times. Utilizing a licensed Realtor or real estate agent, however, can greatly ease this burden and make the process seamless. Madeline Smallwood, Realtor at Keller Williams Market Pro Realty in Bentonville, Arkansas advises buyers that, “I think a shortage is going to continue into 2020 with prices rising. Buyers will need to come into the market planning to make solid and clean offers…That shouldn’t scare them away from buying in 2020 as long as they have an experienced agent on their side who can help them make an informed decision.” Find your perfect agent on Homes.com with our Find an Agent tab. 

Jennifer is an accidental house flipper turned Realtor and real estate investor. She is the voice behind the blog, Bachelorette Pad Flip. Over five years, Jennifer paid off $70,000 in student loan debt through real estate investing. She’s passionate about the power of real estate. She’s also passionate about southern cooking, good architecture, and thrift store treasure hunting. She calls Northwest Arkansas home with her cat Smokey, but she has a deep love affair with South Florida.

Source: homes.com