In this competitive real estate market, multiple offers and bidding wars occur more often than not. Thus, buyers look for every advantage they can get to win their dream home over other competitive offers. Whether it be, writing the sellers a personal letter to try and create an emotional connection or submitting a large earnest money deposit to prove their financial strength. However, more often than not, it all comes down to the final price. Therefore, for this week's Real Estate Tip of the Week, I want to discuss what an escalation clause is, when to use it, and how it can help you get your offer accepted.
To start, an escalation clause is an addendum added to the sales contract that lets a home buyer basically say “I will offer to pay 'x' price for this home, but if the seller receives another offer that’s higher than mine, I’m willing to increase my offer to 'y' price and willing to keep increasing my offer to a maximum price of 'z'.” So from that, there are three main parts to an escalation addendum and they are:
• The original offer to purchase price
• How much will that offer price be escalated above another competitive bid?
• What is the maximum offer price that the buyer is willing to offer if it escalates to such price?
For example, say there is a home on the market in Arlington in a desirable neighborhood for $505,000. Buyer 1 decides to make an offer of $500,000 for the home and his Realtor adds an escalation addendum that will increase Buyer 1’s offer in increments of $2,000 above a competing offer. In that addendum, Buyer 1 states that at most, they are willing to offer $510,000.
If there were no other offers submitted on the home, Buyer 1’s offer would remain at $500,000. However, if Buyer 2 makes an offer at $502,000, then Buyer 1’s offer would automatically escalate to $2,000 above that, bringing Buyer 1’s offer to $504,000. If Buyer 3 decided to make an offer at $512,000, then Buyer 1’s offer would escalate to the clause’s maximum of $510,000. At that point, it would be up to the seller to determine which offer to take and Buyer 1 would hope to have better contingencies in order to win.
Escalation clauses/addendums are most commonly used when it is evident that there are going to be multiple offers. It wouldn’t be smart to use one in a case where other offers are not expected because an escalation clause is basically telling the seller how much a buyer is willing to pay.
With all of this said, it is important to remember that while price is often the deciding factor, other factors come into play. The amount and quality of contingencies is often something that makes a seller accept a lower offer price in a competitive situation. You might ask, what do those better contingencies look like? Well, come back next week for another great Real Estate Tip of the Week as I will go into detail on how you can craft your contingencies to be as competitive as possible!