ESCALATION CLAUSES CAN BEAT THE PACK – DON’T RUSH

By
Real Estate Agent with Re/Max Classic 314578

 

HOT MARKET? ESCALATION CLAUSES CAN BEAT THE PACK

If you’re moving up to a market where home sellers routinely receive multiple offers, you may want to include an escalation clause in your purchase offer. The clause stipulates that you will top any other buyer’s offer by a specified amount, say $500 or $1,000, up to a set ceiling, such as $20,000 over asking price.

From a negotiation perspective, it may not be prudent to place the escalation clause in the original offer, signaling a willingness to pay more than the stated offer for the property. Instead, you may want to instruct your agent to include a phrase such as, “Please talk to me before accepting any other offers.”

An escalation clause is a good idea if you just “have to have” a particular house or when multiple offers are expected on the home. Note, however, that other buyers could set a higher ceiling or the sellers could select the “best” offer on factors other than just price.

Be careful that your escalation offer doesn’t result in a price that exceeds the home’s market value. If so, you’ll need to make up the difference with a larger down payment (or lose the house) and you may have trouble recouping that higher cost when it comes time for you to sell.

 

 

RUSHED CLOSINGS RISK PROBLEMS


In the sellers markets we’ve seen during the last  year, buyers have had to compete hard with other buyers, trying to make their offers more attractive. They’ve employed creative strategies, including escalation clauses (to match and surpass other offers), buying before selling their current homes, foregoing home inspections, and shortening the time between contract and settlement dates.

If you’re looking at buying or selling a home in a hot neighborhood or you simply need to buy or sell a home quickly, you may be inclined to waive some traditional contract protections. Doing so could create serious problems.

Eliminating a professional home inspection as a contingency in your purchase offer is a risky strategy. At the very least, you should include a non-contingent home inspection in the contract. That way, you’ll at least know what to expect once you move into the home, even if you have to pay for the repairs.

But what if you are selling your home to buyers who don’t include an inspection contingency? You would be wise to have the buyers sign a statement saying they waive the right to a home inspection and will not hold you responsible for defects found in the home later. This minimized the possibility of after-settlement legal action against you.

Speeding up the time between contract and settlement can also cause problems.Some steps in the home-sale transaction just take time — title search, loan approval, inspections and appraisals. If these steps are rushed, mistakes can be made and lawsuits can follow. It’s better for everyone to let the process evolve on a sensible schedule.

 

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Rainer
220,151
Suzanne Otto
Six Twenty Designs - Lansdale, PA
Your Montgomery County PA home stager

Good advice Tom. I know too many people who have attempted to buy homes, only to be beaten by a better offer. I'm sure if they knew about this clause, they might have had a better shot.

May 21, 2013 12:59 AM #9
Ambassador
1,440,626
Richard Iarossi
Coldwell Banker Residential Brokerage - Crofton, MD
Crofton MD Real Estate, Annapolis MD Real Estate

Tom,

I've been doing this for a while, and maybe it's just a local thing, but I've never seen a clause that said, "please talk to me before accepting any other offers."

The common practice around here is the escalation clause goes with the original offer.

Rich

May 21, 2013 01:00 AM #10
Ambassador
2,893,292
Anna Banana Kruchten CRB, GRI, WLS
Phoenix Property Shoppe - Phoenix, AZ
603-380-4886

Tom we've been in a not market for sometime now and escalation clause - if used properly can worked.  That is a big "IF".  One agent submitted it with his original offer which was $20K less than the listed price.   We had 5 or 6 offers total.  Seller was not pleased with the low offer approach and chose to take an offer that was over list to begin with. All went well. BA called and asked why the seller didn't bit on his offer?  Now he understands it better....there is a good way to use escalation clause and not so good way.

May 21, 2013 01:45 AM #11
Ambassador
1,613,975
Harry F. D'Elia
RentVest - Phoenix, AZ
Investor , Mentor, GRI, Radio, CIPS, REOs, ABR

It is all about submitting a best offer on the listing. Be best at all times. Low ball offers are not wanted.

May 21, 2013 02:22 AM #12
Rainmaker
1,551,465
Lyn Sims
RE/MAX Suburban - Schaumburg, IL
Schaumburg IL Real Estate

I'm with Lenn, why be shy? Why be coy? Seems corny.

May 21, 2013 02:58 AM #13
Rainmaker
656,967
Joetta Fort
The DiGiorgio Group - Arvada, CO
Independent Broker, Homes Denver to Boulder

I've had agents submit escalation clauses and require to see the competing offer.  I'm not going to show them someone else's offer, or at least not without blacking out all personal info.  So I'd be giving them something that proves nothing.  Do you ask for proof of other offers?

May 21, 2013 05:04 AM #14
Rainer
104,744
Tom Gilliam- RE/MAX Classic
Re/Max Classic - Farmington Hills, MI
Exceeding Your Expectations

I don't ask to see other offers, I simply let the sellers agent know we are willing to go above (to a certain extent) to purchase and beat other offers

May 21, 2013 05:12 AM #15
Ambassador
2,083,710
Michelle Cherie CarrCrowe Just Call...408-252-8900
Get Results Team...Just Call (408) 252-8900! . DRE #00901962 . Licensed to Sell since 1985 . Altas Realty - San Jose, CA
Family Helping Families Buy & Sell Homes 40+ Years

Escalation clauses can help win the house; however it sometimes means the buyer pays a premium.

May 21, 2013 05:23 AM #16
Rainmaker
1,560,731
Carla Muss-Jacobs, RETIRED
RETIRED / State License is Inactive - Portland, OR

I've used them and I like them.  They can work.  I also like it when the listing agent tells me that they will work the first offer in.  I like the "first come, first served" rather than the bidding wars.  Oh well . . .  

May 21, 2013 05:35 AM #17
Rainmaker
979,368
Aaron Hofmann
Atlanta Communities - Smyrna, GA
aka Mr. Smyrna Vinings

We started using escalation clauses again about two years ago when the multiple offer situations started popping up. I think it scared some listing agents and we had to walk them through it and explain (seems pretty self-explanatory), but there are a lot of agents that struggle with outside the box thinking.

May 21, 2013 07:47 AM #18
Rainmaker
1,282,430
Edward & Celia Maddox
The Celtic Connection Realty - Queen Creek, AZ
EXPERIENCE & INTEGRITY - WE TAKE THE HIGH ROAD

In a really hot seller's market, this practice works most of the time.

May 21, 2013 08:02 AM #19
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1,154,628
Bryan Robertson
Los Altos, CA

I generally avoid using escalation clauses because they can result in offers the buyer ends up regretting.  That said, in the highly competitive market, there are times when such offers are necessary to win.

May 21, 2013 08:09 AM #20
Rainmaker
1,317,551
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

It is important to discuss all the pros and cons of using escalation caluses.  It ultimately is up to the consuimer to decide what to do.  I always suggest they know their bottom line.. and not to make such a clause open ended.  As foregoing an inspection, I have them sign a form that they have been advised to have an inspection and have knowingly made a decision not to have one.

May 21, 2013 12:04 PM #22
Rainmaker
758,826
Jill Sackler
Charles Rutenberg Realty Inc. 516-575-7500 - Long Beach, NY
LI South Shore Real Estate - Broker Associate

Thanks for explaining the process so well. I've never had the occasion to use them yet but maybe one day soon.

May 21, 2013 12:40 PM #23
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Christine Donovan
Donovan Blatt Realty - Costa Mesa, CA
Broker/Attorney 714-319-9751 DRE01267479 - Costa M

Tom - Good things to consider regarding the escalation clause.  I agree that waiving the inspection is just risky.

May 21, 2013 04:30 PM #24
Rainer
2,988
Steven Bullock
Agent Alliance OC - Keller Williams Realty - Rancho Santa Margarita, CA
AgentAlliance

You may get the offer accepted (if the listing agent and seller aren't turned off by the tactic), but at what cost? Probably the buyer's ceiling or above.  This clause is only applicable in a multiple offer situation, and if used otherwise, you just showed all your cards. In either case, you don't gain real bargaining power.

If I am a seller and I am in a multiple offer situation, why wouldn't I just counter at the buyer's ceiling or above it for that matter.  I disagree with the majority here, you may think you are gaining bargaining power, but you are doing the opposite, the buyer is showing their cards.  If I have multiples, I usually counter with a highest and best, but in this instance would counter at slightly higher than the ceiling (assuming the ceiling is the highest number potentially on the table), then see who bites; you may have a straggler who shot for the fences who did not realize the amount of competition and then steps up due to the multiple offer. If the escalation buyer truly wants the property up to their ceiling then they will go to that price or above. Yes, they may choose to gamble and offer lower than their ceiling, but they then risk losing the deal.  Remember this buyer just said he wants the property so bad that he is willing to best anyone's offer up to some amount to get the deal accepted. So originally they wanted to take the uncertainty out of it (not gamble) as evidenced by the escalation clause, but then decide to go in lower not knowing the other offers on the table? The seller remains in the driver seat with this buyer as long as you do not disclose the other prices and create that doubt with the escalation buyer that they are not the highest offer, they'll probably push to their best and final (their ceiling or above). 

The other point is  that buyers who use tactics like this to edge out their competition are usually the same buyers who look for other angles to set themselves up with an advantage during the escrow; sellers beware.  It is not that listing agents don't understand the clause, it is very self-explanatory, it's that some understand the psychology of this type of buyer and pay attention to the red flag, the mentality that they are willing to do whatever it takes to give them an edge usually is presented during the escrow in some other form or fashion, which normally doesn't bode well for the seller.  Clean offers (across all terms) are usually the best indicator of a smooth transaction.  So if the offers are close enough, I would always favor the non-escalation buyer.

May 21, 2013 05:42 PM #25
Rainer
104,744
Tom Gilliam- RE/MAX Classic
Re/Max Classic - Farmington Hills, MI
Exceeding Your Expectations

There are two sides to this, either a buyers angent or a sellers agent,,,two way to look at it

May 21, 2013 11:16 PM #26
Rainmaker
1,499,537
Inna Ivchenko
Barcode Properties - Encino, CA
Realtor® • Green • GRI • HAFA • PSC Calabasas CA

My least favorite counter request( or strategy) while in multiple offer situation is removing an appraisal contingency( if the buyer is using any financing). Everyone knows that the property will not appraise and the buyer must bring more cash to the table.

 

May 22, 2013 04:46 AM #27
Rainer
48,526
James Hoff
Century 21 Award - Rancho Santa Margarita, CA
Real Agents Work

Tom, I have to disagree with this practice as a whole.  First, by asking the agent to “Please talk to me before accepting any other offers” basically tells me as the listing agent that you are holding something back and that I might be able to "squeeze" something more out of you.  If I call you, are you going to let me know your client's ceiling?  Put the escalation clause on the offer or counter offer for that matter ... it makes no difference because your ceiling is the tell all that I can definitely counter to get that out of your client.

I have to agree with Steven Bullock's response on this one.

Two sides to this ... here's my thoughts on both then:

I represent the seller: I just received your offer with the escalation clause.  Now my seller knows that your buyer will pay more and basically left a lot of the table (which makes no sense because you disclosed what they would pay anyway).  I have an obligation to my seller to get the best price for the property so you can expect a counter at or above the ceiling.  Will you win the deal?  I don't know, because a few flags are raised now.  Are you trying to "pull a fast one" to get into escrow and then you're going to ask for the world back?  Is your buyer REALLY willing to pay that much over asking price?  If so, we'll likely have to remove the appraisal contingency as well since (even in a market like this) and maybe it just adds up too much in the end.  I have several other offers on the table (since you indicated it's usually a multiple offer situation) so I would counter with best and final to everyone and if push comes to shove and we are close with you and a few others ... I'd be just as inclined to recommend the other offer that is potentially cleaner.  HONESTLY ... that extra $X amount is likely not worth taking over another cleaner offer.

Since we have to represent both perspectives to be fair ...

I represent the buyer: I would NEVER advise this escalation clause.  First, offer it with no ceiling and my buyer would definitely have to waive the appraisal contingency and be willing to come out of pocket with (in theory) unlimited exposure.  I put the ceiling in per my client's request but am I really doing any favors for my clients who "must have" this property?  If you offer $250k but with an escalation clause will go up $1,000 over any other offer up to $300k then I just laid your hand out for the seller and told them that you would pay $300k and that they should undoubtedly counter us for that.  My job as the buyer's agent is to get the property at the best price for my client at the end of the day.  Offering with an escalation clause literally eliminates the "upside" for my buyer and now we are guaranteed to only get our "worst case scenario" since we are basically asking the seller to make us pay it.

As a listing agent ... you can expect the counter above your ceiling since now I think you're holding back and I don't know that I'd feel good advising my clients to take the offer unless the buffer between your offer and the next was big enough.  As the buyer's agent ... I would NEVER advise and escalation clause and certainly wouldn't disclose your max.

If your client MUST HAVE the property ... tell them to offer their "ceiling" the first time, cut the crap or the smoke and mirrors and get the deal done.

You're thinking creative which is good but I don't agree with the logic on this one.  Best wishes!

May 22, 2013 05:08 AM #28
Rainmaker
3,090,975
Richard Weeks
Dallas, TX
REALTOR®, Broker

The Texas Real Estate Commission has prohibited agent here from using escalation clauses.

Oct 15, 2013 10:07 PM #29
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Rainer
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Tom Gilliam- RE/MAX Classic

Exceeding Your Expectations
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