Throughout my career as an investor and real estate broker I have dealt with many escalation clauses. An escalation clause is technique many buyers employ to try to get a house under contract without paying too much. For example, the buyers may offer $200,000 for a house listing, but be willing raise that offer by $500 increments if another offer comes in higher, up to $210,000. The escalation clause can help buyers get a deal on a house, but it can also backfire on those buyers if the seller knows what they are doing.
How is an escalation clause typically written?
More and more buyers are using escalation clauses because the real estate market has become so competitive. This is how I see many clauses being written:
"If the seller receives any offer more than the $200,000, Bob and Cindy Smith's offer shall increase by $500 increments until it is more than the competing offer, up to $210,000. If a competing offer is received that is higher than Bob and Cindy Smith's offer, the listing agent shall black out all personal information and present it to the buyer's agent for proof of the higher offer."
This clause protects the buyer from paying more money than they have to and makes the seller prove there actually was a higher offer. Pretty smart, right?
Why can't an escalation clause always be used?
I used to list HUD homes and foreclosures for banks, where I saw many buyers and their agents try to submit offers with escalation clauses. I'd estimate 98% of the banks I worked with would not accept an offer with an escalation clause. Banks did not like them for a few reasons:
• Many of the escalation clauses asked the seller's agent to present any competing offers. Other offers could contain private information, and it was unclear if there were legal issues with presenting another buyer's offer to a competing buyer, even with the personal info blacked out.
• The banks wanted to be fair to all parties, and they figured if one buyer was allowed to use an escalation clause, all buyers should be allowed to. They did not want to have to disclose to every buyer that one buyer was using the clause.
• It is not always cut and dry which offer is best based only on the price. Some offers may contain requests for the seller to pay closing costs, for repairs to be made and for varying closing times. One offer may be $200,000, but only net the seller $195,000 after closing costs.
• There is no set price when using an escalation clause. If the seller accepts that offer, there could be varying opinions of what the price should be based on the ambiguity mentioned above. I recently saw a dispute between a buyer and seller that went to court because of an escalation clause misunderstanding.
Because of the problems that come with escalation clauses, some sellers will not accept them, or they may counter the offer with clear terms.
How can a seller use the escalation clause to their advantage?
An escalation clause is set up to give the buyer every advantage. However, the clause is written in an offer that has not been accepted by the seller until it is signed. An escalation clause gives the seller a ton of information, and the seller does not have to do anything in that clause unless they sign the contract.
As a broker and seller, I would never sign a contract with an escalation clause in it. I always recommend countering that offer by removing the clause and adding clear terms. The escalation clause tells us exactly how much the buyers are willing to pay. If they say the maximum they will pay is $210,000, a seller can counter the offer at $210,000 and remove the clause obligating them to provide other offers.
Buyers need to be careful using escalation clauses as it can backfire with certain savvy sellers. Sellers should be able to use an escalation clause to get the best offer out of the buyer’s if they know the proper way to handle them.
How A Prospective Homebuyer's Escalation Clause Works To The Seller's Advantage curated from Forbes - Real Estate
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