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.