Let’s Talk “Real Estate” Turkey! What Is the Escalation Clause?Oct 29, 2020 06:00AM ● By Pamela Johnson
No doubt you have either seen or heard about those long lines outside of homes for sale. Yes, it is a Seller’s market, and it is smoking hot. As Buyers compete for the home of their dreams, they are finding the challenges of winning their new home mounting.
It is pretty darned hard to make a life-altering decision after viewing a home for only 20 to 30 minutes. Regardless, this is the market, and that’s what’s happening right now.
Under these circumstances, how can a buyer get out in front of all that without negotiating against themselves? Well, they might consider adding an escalation clause to an already strong offer.
Escalation clauses vary, but for the most part they address the purchase price of an offer. The typical offer has a steadfast amount that a buyer is willing to pay. An offer with an escalation clause will likely have two other components in addition to that price: (1) A dollar amount above highest bidder, and (2) a not-to-exceed a price.
For example, my buyer offers $400,000 for a home here in town. In Bellingham’s hot market, we are sure this property will draw multiple offers. We want to secure this home without a lot of back and forth or guessing. So, we add a clause that says that in case there is a higher competing offer, we will increase our offer $2,000 (or whatever amount you specify) above a verifiable higher offer. We also add that our offer will not exceed a certain amount, say $410,000 (again, you specify the maximum price you are willing to pay). If there are no offers above the initial $400,000, then the purchase price will remain at that: $400,000. If another offer is $405,000, then my buyer’s offer escalates to $407,000 ($2000 above the $405,000).
This may prompt a couple of questions, such as “Will a Seller view the escalation as an open invitation to a higher offer even without the competition?” and “Does it reveal a buyer’s maximum purchase potential?” The answer to both is “yes, possibly,” but in my experience most Sellers appreciate and understand the concept given the nature of the market.
There are many that dislike this approach because it feels “unfair.” One could easily argue that it is. Still, the escalation clause can be appreciated because it attempts to streamline the process for both buyer and seller, eliminating the unknown while simply cutting to the chase.
Is an escalation clause going to definitely win a buyer that home and beat out the competition? I cannot promise that. It is not for everyone, but it is something to be aware of because it is another avenue toward making the most compelling offer in this extremely competitive real estate market.
Submitted by Carol Ann Palmieri, Home-Sale Artist (left) of Al and Cal Realty Group, RE/MAX Executive Realty. Palmieri may be reached at 508-494-9061 or [email protected].