Despite being in a robust sellers' market (for homes priced well for condition and location), escalation clauses seem to have lost some of their favor for some Sellers, even though they are widely used.
While I think they can still be an effective tool in a Buyer's Agent's toolkit, they can backfire if not used properly.
Take a recent listing where the list price was $975,000 for a large home in a highly sought after neighborhood where homes rarely came on the market. As in, maybe once a year you may get a shot at this particular neighborhood.
Common sense would dictate that if this is the neighborhood a Buyer simply HAS TO HAVE they put their best foot forward since the odds of their getting another shot until NEXT year are pretty slim.
Instead, the Buyer decides, despite the Buyer's Agent very capably showing comps and market statistics to support the list price, which even seemed a little on the low side, that this was just the right time to use an escalation clause. Because, after all, a friend of a relative in another state a few years ago used one and was successful in getting the property.
And we all know that those third party experiences trump whatever your agent could know, right?
Anyway, the Buyer proceeds to instruct, no, INSIST, the Buyer's Agent to prepare an offer for $925,000 but to include an escalation clause in $1,000 increments to a maximum price of $1,025,000 because apparently this Buyer thought that the top number indicated her seriousness in wanting to buy the house.
Unfortunately, the Buyer miscalculated how the home Seller would perceive the $925,000 initial offer price and end up accepting an offer that was lower than her $1,025,000 because he and his agent realized that unless he received another comparable offer offering $1,024,000, that $1,025,000 wasn't a real number.
It was just for show.
What was real was the competing offer that was list price, with reasonable terms, games not included.
So, had the Buyer with the escalation clause decided, instead of trying to outsmart everyone else, to write an offer that was just slightly over list price - and far below the $1,025,000 she said she would pay - she would have very easily gotten the house of her dreams.
Escalation clauses, when used correctly, are often exactly what a Seller likes to see. They want to know they have not left any money on the table and that the offer they take is the best they are going to do.
Escalation clauses must be used judiciously, however, and are not necessarily all that it takes to win the day because price is not the only consideration when it comes to deciding which offer best fits the Seller's needs. Terms matter, too.
Escalation clauses when used incorrectly can turn a Seller off, especially when the initial offer price is below list; it's just a big old red banner screaming "I don't think your house is worth what you are asking, but if I have to pay more to beat out someone else, I will."
Trust me, that's not a message Sellers want to hear.