Right now in the Spring of 2021 the real estate market on Oahu is a crazy seller's market. Most homes are having anywhere from 10-30 offers depending on the part of the island and the price point. For that reason, many of my clients have been asking about acceleration clauses so I wanted to spend a couple of minutes explaining "What is an acceleration clause?" While I am not a huge fan of these clauses, it is important to understand how they work and how they can be used to help you get your offer accepted in this type of market.
In simple terms, an acceleration clause is often used when a buyer knows that there will be multiple offers on a property. The clause will state that the buyer will pay some amount of money over the highest price offer. In effect, the acceleration clause states that you will beat any other offer for the property.
Lets use a $1 million property as an example so the numbers are nice and round.
- Assume that the offer price for the property is $1million
- Lets say that your acceleration clause states that you will pay $25,000 over the highest offer price.
- You offer $1.1 million for the property that has multiple other offers
- Lets say that in this example the highest other offer is $1.15 million
- With your acceleration clause you are now saying that your offer is $25,000 above that higher offer for a new offer price of $1.175 million.
Now this gets really tricky if there are multiple offers with acceleration clauses. As you can imagine, these offers are great for sellers as they can quickly increase the offer price for their property. The other complication in this equation is that unless you are looking to make a cash offer, you also have to think about the likely appraisal price for the property. For that reason, many times your acceleration clause may also have an accompanying appraisal clause. I will answer your questions on that clause in an upcoming post.
As you may have figured out, the reason that I am not a huge fan of acceleration clauses is that they can quickly increase the value of your offer and may result in you have to make a much larger down payment depending on the appraised value for the property. If you really think that this is the right property for you, then an acceleration clause may be appropriate. However, this needs to be a very strategic decision and much be discussed in detail with your realtor before you decide to use this type of clause in an offer.
Hopefully this provides you with an understanding of appraisal clauses. If you have additional questions, please feel free to reach out and ask!