You just toured the house of your dreams. You can already picture your great grandmother’s armoire in the dressing room. When you close your eyes, you see your goldendoodle bounding gleefully with bunnies in the backyard.
But alas… before you’ve fully reviewed your written offer, the list agent reveals that he’s expecting at least three offers before 6 p.m. What felt like your future veranda now feels like the front steps to a highly charged auction house, where a stronger bidder can crush your dreams to cosmic dust.
Your sense of urgency launches. You’ve already reserved the antique movers. You ordered return address labels, albeit slightly prematurely. Ok, Houston, we might have a problem here! What can you do to rise above the competition and avoid a bidding war of intergalactic proportions?
Enter the escalation clause! It might just help you reach the stars…
An escalation clause, or “escalator,” in a contract tells the seller that you’re willing to increase your offer if another one exceeds yours. When submitting a contract with an escalation clause, you’ll need to consider the following questions:
When is an escalator appropriate?
You don’t want to overpay – but you cannot afford to lose the opportunity. You are completely convinced that other buyers see what you see and want what you want. The listing is new and likely to go under contract quickly. You understand your financial limitations. You’re committed to buying this property. Your agent knows how to use this strategy effectively. And you need a little rocket fuel.
Is an escalator necessary?
It’s possible your offer would succeed without the escalator. Has the property been on the market for 20 days already? Do you really want to show your full hand initially? Can you afford to expose your purchasing capabilities? Would standard negations be too risky? Will the seller use your ceiling to write a higher counteroffer?
What if you tighten your offer enough to satisfy the seller? Price isn’t always the determining factor. Other terms carry a lot of weight, individually and collectively. A conversation between agents might reveal the seller’s highest priorities … such as the removal or limitation of inspection periods, the ability to close on a specific date, a cash position, or a sense that the buyer truly cherishes the seller’s investments. Your agent should be collecting as much intel as possible to ensure your offer is more attractive than your competitors.
How high is your sky?
Once you feel comfortable with an escalation clause, it’s time to determine how much you’re willing to pay and the specific increments by which your offer will increase in a competitive scenario. Suppose the property is listed at $950,000. In a low inventory/high demand market, you might offer $960,000 with increases in increments of $5,000 above any competing offers and a maximum of $1,050,000. If yours was the highest offer, your price of $960,000 remains. And if the highest competing offer was $975,000 your offer would automatically escalate to $980,000.
What could go wrong?
It is critical that all parties involved understand how escalators work and how they can be beneficial. Inexperienced agents might have little ability (or desire) to effectively explain them to the seller, let alone advocate for a creative approach.
Some sellers do understand escalators but still resist them. Why though? Don’t they stand to command a higher sale price? Yes, but these are the objections we’ve encountered in our experience:
- It can appear that you are acting in bad faith by flaunting a price ceiling that they might not actually realize.
- Some sellers feel guilty awarding a property to a buyer who “played a clever game” and won by a relatively narrow margin.
- Cleaner, straight-forward terms add fewer layers of legal confusion, translation, and obligation.
- Some sellers prefer to give everyone the same opportunity to submit their best and final offers with a universal deadline.
- Unethical agents might downplay the advantages of an escalation clause simply to earn a higher commission with a different buyer.
It is often in the best interest of the seller to entertain an escalation clause, so be certain your agent knows how to approach a list agent, and if necessary, how to explain the clause so the proper messages reach the seller.
Be aware: if you’re applying for a mortgage, the property might not appraise at the price you offered. Are you prepared to pay the difference in cash upon settlement?
Is it written in the stars?
To get our clients to the moon, we prepare for the mission. One of our most effective strategies is to present the offer with a letter proclaiming that we come in peace. Because you generally won’t be sitting with the seller face-to-face, you’ve got one shot to make a great impression. A heartfelt expression of your appreciation of the property along with a brief assurance that your escalation clause is a good faith gesture can propel you further than you may realize. Our guidance in offer presentations has resulted in countless success stories.
In summary, the escalation clause can increase your chances of having your offer accepted. It is an edgy, powerful, and somewhat complicated tool with legally binding and enforceable consequences. It’s not standard in contract to purchase real estate, and certainly not a resource to be taken lightly or used by inexperienced agents. Language must be carefully crafted for efficacy and protection. And there might even be multiple offers with escalation clauses.
Most agents are not legal experts, so it’s always a good idea to hire an attorney expert to review language you add to a contract – especially if you have any concerns, doubts, confusion, or questions.
If you are looking for agents with a track record of rising above the competition, contact Brent and Jessica at Robertson Luxury at 239.810.1220 for a stellar experience.