How Badly Does Your Buyer Want It?
Your Buyer Might Have To Ante Up To Win The Home
Buyers in the fast paced markets sometimes need to get serious to win the bidding wars. An escalation clause is a tool buyers can use to make sure another buyer won't out-bid them. Use caution , however, if you're considering this strategy.
Win The Bidding War
In a nut shell, an escalation clause says you will increase any other offer by a certain amount, for example, $500 or $5,000, up to a set ceiling, such as $25,000 over the asking price. The clause should also include a termination date. Of course, if your first offer is accepted by the seller, then the escalation clause is doesn't come into play.
If your buyer simply must have the house in their sights, and they can afford to pay that extra $25,000 if they have to, an escalation clause might enable them to fend off competing buyers. It allows them to offer the highest price possible to win the home. Just remember, another buyer may set a higher escalation ceiling. Keep in mind, the seller can still select the "best" offer based upon factors other than price. The best offer may have terms such as occupancy post closing, as-is with the right to inspect, quick close or long close.
You Might Just Win The Bidding War
One down side of an escalation clause is that a seller may accept a contract for well over the home's market value. The problem with that is, the buyer's lender won't loan him more than the home's appraised value. If the appraisal comes in below the sales price, the buyer must make up the difference by increasing the down payment.
From a negotiation standpoint, it may not be prudent to place an escalation clause in the original offer, because it could tip off the sellers that your buyer is already willing to pay more for the property than you have offered. Still, some markets move so swiftly that this is the best option available for serious buyers. Especially a serious buyer that has already had a few properties slip through their fingers.