An escalation clause can be a great way to structure an offer to be the winning bid in a red hot seller’s market. When you know buyer competition will be high on a home, it it also means you may be competing with multiple offers .
Here in the Massachusetts Real Estate market we are seeing certain communities or properties that will most likely be in a bidding war with multiple offers with in days of hitting the market. It can be very frustrating time for home buyers.
What is an escalation clause?
An escalation clause is you offer a certain price and than agree to pay x amount above the next highest acceptable offer up to a certain price, called a cap. For example you offer $500,000 for a house and you submit your offer with an escalation clause saying you will offer up $2500 over the next highest bid, up to $550,000.
A typical escalation clause will read like this:
In the event the seller receives one or more valid offers with terms acceptable to the seller, but which the net proceeds to the seller is equal or greater to the net proceeds of this offer, then the stated purchase price in this offer will automatically generate net proceeds to the seller equal to $2500 in excess of highest net proceeds of sale generated by other offers. The sales price is not to exceed $550,000. The Seller will provide the Buyer with sufficient documentation to justify the sale price increase. The buyer understands the escalating clause in this offer may result in multiple escalations and in some cases escalate to the cap.
When To Use An Escalation Clause?
You really only want to use an escalation clause when there is a very high likeliness of being in a multiple offer situation.
Talk to your buyer’s agent and discuss the possibility of including an escalation clause. When a property is new to the market, appears to be priced well and has a ton of buyer activity, there is a good chance it will be in a multiple offer situation.
Many homes here will have 20, 30 or more groups of people going thru the first open house if it is going to be in a multiple offer situation.
I have been very successful in helping my buyer clients get the home they want by using an escalation clause and beating out the next highest bid by $1000 to $1500.
I Don’t Want To Overpay For A House
Many times home buyers confronted with a multiple offer situation will back away and not submit an offer. There reasoning is they think overpaying if they offer over full price.
On the other hand, if you want a good home there are plenty of other buyers you need to compete with in many markets right now. It is one thing if you are capped out on what you can afford. But if you feel you are being forced to overpay, think again.
While of course no one wants to overpay, are you really overpaying?
Fair market value is really determined by the buyers. Fair market value is the amount the general buying public is willing to pay for a home in a reasonable amount of time in the open market.
Well, when you have multiple offers, it goes to show you the desirability of the home to the general buying public. The buying public has justified the price on a home when multiple buyers are willing to pay over asking.
Home buyers too often get caught up thinking a listing price has all that much to do with value.
Their thinking is if they get a home for less than the listing price they have secured a “good deal” on a home. The listing price can have little to do with what the fair value of a home. Homes can be severely overpriced, slightly overpriced, priced right at market and under priced as well.
You very well could pay over asking and still get a good deal on a home.
Is There Any Downsides To An Escalation Clause
While an escalation clause can be a highly effective tool it could come with some downsides.
In rare cases, sellers can’t wrap their heads around an escalation clause and ignore the escalation piece. They find it too complicated. The good part is that in many parts of the country its become common and a listing agent should be able to explain it well to a seller.
There may be unscrupulous sellers that fake an offer just to get more money. Always ask to verify a buyer with an offer, copy of the deposit check, pre-approval letter and a copy of the agency disclosure. Just make sure account numbers are removed.
Lastly, if you are not in a multiple offer situation, it can backfire on you. You have tipped your hand to what you are willing to pay if there are no other offers on the table. It compromises your negotiating position.
Be The Winning Bidder On A Home
First you should understand what can happen with multiple offers. An understanding of what fair market value is also important. Lastly, you should discuss a negotiating strategy with your buyer’s agent.
Yes…. I said discuss a negotiating strategy. A good buyer’s agent is well versed in negotiating, but there are several moving parts that need to be assessed by a buyer’s agent. Of course if you feel the home is desirable among other buyers this is the time to discuss an escalation clause.
An escalation clause is not going to help if you haven’t put forth a clean offer with a stong pre-approval letter. It is still important to present both to a seller with an escalation clause.
Pull these things together and you can certainly increase your odds of being the winning bidder in a multiple offer situation.
- Michelle Gibson What Not To Expect With Multiple Offers
- Bill Gassett How To Get The House You Want
- Conor MacEvilly Is The Highest Offer Always The Best Offer?
- Paul Sian Negotiating for Real Estate
This article, Escalation Clause- Win the Bidding War, was provided by Kevin Vitali of EXIT Group One Real Estate. I have helped 100’s of home buyers over the years and am confident my experience and skills can make purchasing your next home a pleasant experience. Please feel free to reach me at 978-360-0422 to discuss your upcoming purchase.