Category Archives: escalation clause

The Escalation Clause is a Mess. Simplify Your Escalation Terms to be Accepted.

Why wouldn’t a home seller accept an Offer with a promise from the buyer to pay $1,000.00 more than another bona fide offer in the seller’s possession? Well, they likely would if a buyer made that Offer. Rarely is an Offer made this simple. Escalating price offers are muddied with conditions of seller providing proof, calculating price by deducting for eligible credits, and buyer’s final approval. It’s the uncertainty of the caveats which dilute the promise to a giant “maybe”; and maybe means “maybe not”. Once tied into a contract, untangling is difficult. Rather than take a chance on the caveats, owners prefer to avoid the escalation clause and counter the cleanest offer on price. The escalation clauses used today challenge the ability of the presenting agent to explain the nuances. The more confused the seller becomes, the more likely the seller is to look away.

If the reason the Escalation Clause is not preferred by sellers for reasons of uncertainty and lack of clarity, the solution is simple: eliminate the uncertainty. The following is an escalation clause suggestion for the well qualified, confident, risk tolerant, prepared buyer who intends to own the property.

First, know we are likely to pay more than we planned to get the home we want to own. Is that overpaying? Maybe. That’s for you to decide after you factor in the reasons you’re trying to buy. Understanding we are in a market where price and terms are set by the seller and driven by consumer demand is where we can choose to begin, or wait to be convinced. The sooner we acknowledge reality the closer we are to an accepted Offer.

Second, be prepared. There are pre qualification letters, pre approval letters, and loan commitments. You don’t have to have an accepted offer to get an underwritten commitment letter for yourself to buy a property. Lenders will do this for you to improve your negotiating position. They may charge a fee, but I know a few local lenders and mortgage companies who will do this for you for free. Put yourself in the place of the seller. You want to know the buyer is absolutely positively prepared with financing or cash in the bank to buy your home. Conditions of verifying information and underwriting approval require a seller to wait in uncertainty for several weeks. If you could avoid that wait and worry you absolutely would. So will the person looking at your offer.

Third, write the Offer you can live with even if it means you paid more than you might have had to. You’re going to think about the price you paid once, and you’re going to forget about the price when you begin to live the life you see for yourself in the home.

Fourth, tell the owner you will pay more $_________ than the price on page one of the bona fide offer they have in their hands at the time of acceptance of your offer. Cap the amount you are willing to escalate your Offer to.

Fifth, and this is the most important part of your escalating offer promise. Don’t require any proof of a bona fide offer from the seller. Trust them. Trust the listing firm is not misrepresenting your proposal and the calculation is being done as stated in your offer. Remember, never, ever have we required a seller prove they have other offers when we’re told other offers are in or coming in. Demanding to see proof is unique to the escalation clause and the reason to demand that proof is inconsistent with the normal practice of making a decision on terms based on what we think is reality.

Your escalating price should be determined by comparing only the purchase price number on page 1 of the Offers. Forget about deducting for credits, concessions, and costs to close. The proof requirement, the deductions for credits, concessions, and cost only confounds the seller. Keep it simple. Make it attractive. Own the home if that’s what you want to do and move on. To compete and win, put your commitment on the table and stand behind your promise. Give the seller every reason to trust you. The other buyer’s are giving the seller reasons to doubt them. Let them be them, you be you and you be committed.

Is This Really a Price Escalation Offer? Probably not.

Buyer: “Mrs. Seller. You are asking $300,000 for your house. Here is my offer for $300,000.  If you get another offer by 7:00 PM tonight for $300,000 or more, my offer will then be $1,000 more than that other offer, up to $351,000.”   The first price escalation offer may have started just like this. A capable, committed, fearless buyer promising to pay more than any other offer the owner has in hand,  up to a specific amount. That’s a true escalation offer. It’s free of stipulations. No if, and, or but. This buyer is appealing.

The Price Escalation clause common in our market is remarkably diluted of fearless commitments from the buyer with weak if, and, and buts.  If we take the written watered down clause and put it in a conversation it looks like this:

Buyer: “Mrs. Seller. You’re asking $300,000. My offer is $300,000. If you have another offer in hand for $300,000 or more, I’ll increase my offer by $1,000 up to $351,000. BUT you have to show me the other offer as proof. AND I get to scrutinize it to see if that offer has credits, concessions, or seller costs which mine doesn’t have. If after I compare to make  sure we are apples to apples, and I’m satisfied, I will sign an amendment to change the purchase price. Oh, by the way; if the appraisal doesn’t support the price, I can rescind my offer. We’ll see the appraisal in oh, 30 or 35 days from now. About 5 days before closing. ” 

Every real estate licensee and attorney  sees the caveat filled contingency is trouble waiting to happen.  The buyer who needs this kind of protection is not the price escalation buyer you want. This buyer is hopeful that you will be so enthralled by the big number that you will overlook the conditions. The game is on and it’s a gambler’s game. You and the buyer are taking a chance that the appraisal will or will not support the Offer price. A low appraisal is a big win for the buyer. You’re 4 weeks closer to closing and your other buyers are gone as is your leverage.  So, before you accept an offer with a diluted escalation clause you gotta ask yourself: “Do you feel lucky?”

A skilled real estate licensee will know how to modify the Offer to protect you when this contingency shows up in your offer. It’s great to have a strong, committed buyer interested in your property. The buyer capable of a true escalation commitment won’t be afraid. You’ll know her when you see her offer.