The Debate Over Escalation Clauses - The REAL Fiduciary Duty Lies with US
We’ve exhausted the discussions of pocket listings and drone photography so, I suppose it’s time we move on to the next hot topic! Recently we have had many heated debates over Escalation Clauses. Escalation Clauses are widely used in many states - especially those in hot real estate markets.
I don’t recall the first time I utilized an Escalation Clause but, I can tell you, for my Buyers and Sellers, they’re the next best thing to sliced bread! And with the Charlotte real estate market heating up, bidding wars becoming more prevalent and our extremely low inventory, buyer demand is at a peak. Winning in bidding war situations is imperative to some Buyers who have absolutely GOT to find a home and Close in a sort timeframe.
Whether a sweet letter with a photo of our Buyers is included or an extremely strong pre-approval letter or financial statement is provided, buyers simply need an advantage - and that remaining advantage is PRICE. An Escalation Clause to a Contract is perfectly legal if penned by an attorney in North Carolina.
My personal take on agents who refuse to accept Contracts with an Escalation Clause for their sellers is that they simply do not understand the process. I also believe the same goes for agents representing Buyers. The process, however, is incredibly simple.
How Does An Escalation Clause Work?
A buyer presents an Offer on a property at X price; a clause is inserted into the Offer to Purchase (OTP) stating that the Buyer will increase their price by $X above competing Offers UP TO $X.
Here’s an example: Property List Price: $500,000. Buyers present OTP at $500,000 with an Escalation Clause that states they will pay $2,000 above competing Offers UP TO $527,000.
How Does This Benefit The Buyer?
Buyers have a better chance of ‘winning’ the bidding war by submitting an Escalation Clause. They may be okay going significantly higher but, question the validity of the claim of other Offers. Requesting name-redacted proof of a competing Offer, gives them the confidence that they will not be taken advantage of by false claims of multiple Offers.
As well, Buyers could only need to improve their bids minimally due to the competitors’ bids. For instance, our latest Escalation Clause won them the bid by only $5,500 following highest and best presentations, when they had been willing to go up to $25K above their original Offer price.
How Does This Benefit The Seller?
Here’s an example following highest and best for a home listed at $500,000:
Buyer 1: $510,000
Buyer 2: $517,000
Buyer 3: $500,000 with an escalation clause offering $2,000 above the highest competing bid, UP TO $527,000.
Seller takes Buyer 3’s Offer and the final sales price for the Buyer is $519,000.
Yes, that sales price is $8K below Buyer #3’s highest possible bid (UP TO $527K) BUT, would buyer #3 have been willing to go above $515,000 without the assurance of the name-redacted Offer, showing the competing highest bid? One never knows but, in this scenario, both parties win - the Buyer wins the home of their dreams and the Seller sells their home for an additional $2,000.
Is the negativity surrounding Escalation Clauses due to the lack of understanding of them? Is the corporate negativity surrounding these clauses due to the fact that brokers fear that agents may pen their own clauses?
As mentioned above, North Carolina agents (provisional brokers) and brokers are not permitted to pen any clauses in a Contract, including an Escalation Clause. However, this very short, simple clause can be provided to a brokerage by their corporate attorney for use by their agents.
Some argue that sharing an ‘Offer’ is a privacy issue - as per our Escalation Clause, the Offer is name-redacted when presented to the Buyer who has presented the Offer with the Escalation Clause. I assure you, there is no breech of privacy.
If in doubt of the benefits of utilization of Escalation Clauses, perhaps a short class on them is in order! They’re simple and a win-win for both parties.
© Debe Maxwell | The Maxwell House Group | SavvyBroker@me.com | The Debate Over Escalation Clauses - The REAL Fiduciary Duty Lies with US
Comments (35)Subscribe to CommentsComment