The real estate market has become so competitive recently that you can almost count on having multiple offers on a home when it first comes to market. In Habersham County, homes listed at $400,000 and below get the most immediate interest and will likely get several showings and competing offers within the first 72 hours on the market.
If you’ve recently been “in the fight” of making an offer on a newly listed home, you may have run into the term “escalation clause.” The escalation clause is one technique that real estate agents have been using to gain the upper hand in negotiation when multiple offers have been made on a property.
An escalation clause works like this: An agent representing a buyer will include a clause or series of clauses in the special stipulation section of a offer to purchase that automatically “escalates” their offer price above any competing offers up to a maximum or ceiling price which frequently is above the list price of the property. This escalation of price may be in $100, $250, $500 etc. increments which keeps the buyer’s offer a specified amount above any competing offers.
The escalation clause attempts to “trump” any competing bids on the first round of negotiation to keep the offer with the escalation clause at a position of prominence as a seller reviews and considers the finer terms of the offer, such as earnest money, closing costs, financing qualifications, inspection period, and closing date. Price is not everything when negotiating a real estate contract, but it is ALWAYS a major consideration and gets the attention of the seller immediately.
Below are some of the pros and cons of escalation clauses for buyers with offers to purchase real estate that you should consider prior to making an offer.
PROS (for a Buyer)
An escalation clause will frequently move your offer to the top of the stack in a multiple offer situation. Who doesn’t want to start at the top in a negotiating situation.
An escalation clause can shorten the time period of a negotiation as it sorts out the highest price offer or offers with the opening offer to purchase. Buyers and Sellers are frequently in a hurry to get a property under contract and prefer to forego a longer negotiation period.
An escalation clause takes care of the price issue allowing you to obtain more favorable terms on other key parts of the offer which may have a higher priority for you than the seller. (A negotiation sleight of hand?)
An escalation clause frequently contains a requirement that the seller show proof of their highest competing offer to justify the “escalation” of the final contract price. This provides you with an “insurance policy” against the seller making up a number that you then have to beat.
CONS (for a Buyer)
An escalation clause “telegraphs” to the seller right up front the top price of what you are willing pay for the property, which means that you have immediately given away one of your primary negotiating tools. The seller can then focus on negotiating other terms of the contract to their benefit rather than yours as a buyer, and you end up having to make compromises that you were not prepared to make in the transaction.
An escalation clause can drive up the price of a home as it feeds the “auction atmosphere” of making an offer to purchase, especially in the case when multiple offers each contain an escalation clause. In the heat of the moment you may end up paying more for the house than you really wanted to, and now you will have a larger mortgage payment.
An escalation clause can push the final contract price higher than the appraised value of the property. Even though you may have an appraisal contingency that protects your position in the contract, you can’t count on an appraisal in a rising and competitive market to help you out if you have bid more than you really wanted to pay. If it turns out that you are financing the sale and the bank appraisal comes in below the contract price, there’s no guarantee that the seller will lower his or her price to meet appraised value. You are then left with a choice of making up the difference with cash between the contract price and the appraised price, or walking away from the transaction which is tough to do in a fast market.
SUMMARY
An escalation clause may or many not benefit you if the seller places a higher priority on other terms of the contract and may choose to completely pass on negotiating with you, which is the seller’s ultimate right to accept any offer they choose, even an inferior one. Your best strategy may be to have your agent work to discover what the primary wants and needs of the Seller are and then craft an offer that gets a “win” for both Buyer and Seller. Price is always important in any transaction but its no substitute for strong negotiating on the part of your agent to best represent you and work out a solution that ultimately benefits all parties.