Escalation Clause - How your offer can go to first place in a multiple offer situation
Are you tired not getting your bid accepted in this hot market?
Enter the Escalation Clause. A tool I have used successfully to give our buyers an edge over the competition.
How does an Escalation Clause work?
If you have ever made a bid on eBay you probably understand the basics of this tool. You make an offer and you agree to increase your offer in set dollar increments if another competing offer is received. You set a predetermined amount (highest price you are willing to pay) upon acceptance of a copy of the competing offer.
Your Offer: Lets say a house comes on the market at $275,000. This price is backed up by a good comparative market analysis (CMA) and your agent agrees with this price. So, you offer $285,000 with an escalation clause of $500 with a contingency for obtaining an 80% mortgage, but add in the Escalation Clause form stating you are prepared to increase your offer by $500 over any other competing offer. This escalating of the offer stops at a predetermined dollar amount. Yours is at $300,000.
The seller's agent has a 3 day hold or review period on offers noted in the listing (seller will keep the property active and accept offers for 3 business days prior to choosing or countering an offer) and you know there will be other offers to compete with.
2nd Offer: Offer number 2 is for $289,000 without an escalation form. The other terms: same loan type, same close date.
Upon receiving a copy of the competing offer, your offer increases to $289,500, five hundred dollars over this competing offer.
What happens and who's offer will the Seller accept?
The seller will accept your offer, it is higher, with all terms the same.
While Escalation Clauses vary significantly, the general escalation clause addendum has 4 basic components:
1) The original offer price is stated
2) The dollar amount increment ($500 on yours), that the original offer amount will be escalated above any other competitive bid.
3) The maximum amount that the buyer is willing to go to to purchase the property.
4) The circumstances in which this clause is used, should be only with multiple offers.
When should an escalation clause be used
Escalation Clauses should only be used by experienced knowledgeable REALTORS because there is risk. Once an Escalation Clause is written and presented there is no going back. You just told the seller how high you are willing to go. I personally would only use one on a newly listed property (less than 3 days) and one that had another offer in. If there is no other offer in you have no need to do an Escalation Clause, my opinion.
If your offer is contingent on an inspection, appraisal for a mortgage or other terms be sure they are included. Has the seller's agent include a review time period for the offer? I do a certain number of days the seller is accepting offers (in my case usually 3-5 business days). It is a good idea to know and understand how all offers are going to be reviewed and responded.
Problems that can happen with an Escalation Clause and why you need an experienced REALTOR
An Escalation Clause should only be used by an experienced Realtor who can clearly explain to you how the process works and answer your questions. A real estate contract is a complicated legal form, adding things to it make it even more complicated. But, there are times when addendums can give a client an advantage in negotiations and should be used. If you are unsure or uncomfortable with your agent using an Escalation Clause have them get their Broker involved.
Weaver LLC, Realtors is an experienced knowledgeable real estate company, at this time we have 2 Associate Brokers and me, the Broker. If you are in this pursuit to win it, we can help. An Escalation Clause is only one of the many tools we use to assist our clients. Call me, Georgia Weaver at 712-291-0118 to help you get the property you want under contract.