In today’s market multiple offers are common place around the Louisville area. Many buyer’s are trying to find ANY edge to get their offer accepted, whether it’s including pre-approval letters, personal handwritten notes to the sellers, or even having their agent present their offer in person. One tactic that has grown in popularity over the past year or two is what’s known as an “escalation clause”.
What exactly is an escalation clause?
Simply put, an escalation clause in a real estate offer lets a home seller automatically increase a buyer’s bid in the event the seller receives another offer that’s higher. The buyer is giving the seller permission upfront to increase their offer without further consulting with the buyer. The buyer is effectively telling the seller “I am willing to increase my offer to X price if you receive another offer that beats me.” While in theory an escalation clause is fairly simple; however, in practice there are a lot of details involved.
How does an escalation clause work?
While escalation clauses can vary, a basic escalation clause has a few basic components:
- What is your original offer of purchase price?
- How much will that price go up and above any other competitive bid?
- What is the maximum purchase price of your offer?
Example, Susie offers $100,000 for a home. Her Realtor adds an escalation clause that, in the case of a higher competing offer, will increase Susie’s offer in increments of $1,000 above the next highest competing offer. Her escalation clause goes up to a maximum of $110,000 (cap).
If no other offers are submitted, Susie’s offer remains at $100,000. If buyer B offers the seller $106,000, then Susie’s offer would automatically increase, or escalate, $1,000 above that, bringing Susie’s new offer to $107,000. If buyer C offers $111,000 for the home, then Susie’s maximum of $110,000 will be eclipsed, and C will have the highest offer.
Why not always use an escalation clause?
The goal of an escalation clause is to help the buyer potentially spend less than immediately coming in with their “highest and best offer” right out of the gate when a multiple offer situation is anticipated. So why not do this every time you ask?
Well for starters, escalation clauses should only be used when the buyer is fairly confident that there will be multiple offers. If a buyer submits an offer with an escalation clause, they’re laying all their cards on the table because the seller knows immediately how far the buyer will go to secure the home. Offers are not contractually obligating until both parties actually agree to those terms in writing; therefore, the seller could actually just counter the buyer with their “maximum bid” (that seller must of hired a Covenant agent!).
Also, this could create a new level of stress for the seller (and maybe listing agent) if they are not familiar with escalation clauses. Imagine getting 5 offers and then trying to decide how an escalation clauses will come into play…sometimes it will just muddies the waters. On top of that, what if multiple buyer’s submit escalation clauses…what happens then?!?
Lastly, what if one of the buyer’s is asking for seller concessions? It is common in our market for buyer’s to ask for closing costs (ex: seller to pay $5,000 in buyer’s closing costs). This lowers the seller’s net but how does that get factored into the final sales price? Depending on which side of the deal you’re on, you’ll want to make sure the language in the escalation clause protects you!
What’s the best way to get your offer accepted?
Your Realtor’s knowledge of local practices and market conditions, along with their negotiating strategy will make your offer much more likely to succeed. Escalation clauses can make sense, but it just depends on the particular situation, which is where your agent should be doing their due diligence with the seller and/or listing agent. In any regard, buyers shouldn’t be tempted to escalate their purchase price above what they are comfortable paying at the end of the day. Make your next offer with confidence!!
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