Escalation Clause Deficiencies

Versions of the real estate escalation clause (sometimes called acceleration clause) are either poorly written or crafted with cunning.

At a young age, we learn to compare apples to apples. Sesame Street taught generations of kids to find one of these things that’s not like the other. Law schools teach students to make oranges appear to be apples and make anything look like something other than what it is. Versions of the real estate escalation clause (sometimes called acceleration clause) are either poorly written or crafted with cunning.  

Pay More Than The Net Purchase Price of a Competing Offer

On page 1 of my Offer, the purchase price compared to the purchase price on page 1 of another offer compares apples to apples. Purchase price on my page 1 to the Purchase price on the competing Offer’s page 1, MINUS credits and concessions, compares apples to anything but apples. 

My Purchase Price Compared to Your Net Purchase Price. Did you think the comparison was purchase price to purchase price or net purchase price to net purchase price? Look again. Here’s how this comparison might play out:

My Offer is $300,000, and I say I will pay $2,000 more than the Net Purchase price of a competing offer, up to $310,000. 

The competing Offer has a purchase price of $308,000 on page 1. Net purchase price is defined as any monetary contributions by the seller outlined in the competing Offer: purchaser closing costs, credits and property prorations.

The first glaring red flag is property prorations. If property proration means property tax prorations, and the tax proration is $10,000, the seller shall credit the buyer $10,000, reducing the competing Offer to $298,000. ($308,000 – $10,000) By comparing e my purchase price to the competing Offer’s NET, my price is not moving from $300,000. (Nothing for the seller to worry about as long as the listing firm’s commission can cover the $10,000 error. )

Define The Terms. Do The Math.

Listing agents who do the math exactly as called for in the story problem escalation clause will protect their clients from stumbling into this mess. Buyer agents who know their clause are comparing anything but apples to apples will protect their clients from paying more than the parties agreed to or getting their Offer rejected because it didn’t do what the agent thought it did. 

One idea—If the escalation clauses are not what they say they are, avoiding them might be prudent.  Consulting an attorney is your first level of protection.

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.

Hottest Trend in Real Estate; Price Escalation Clause

The purchase price of this Offer shall be $1,000.00 greater, up to a maximum price of $_______, than the purchase price of any bona fide offer….

Smart homes, modern kitchens, latest paint colors, big houses, not-so-big houses, the trends never end. This year’s popular trend is not in a can, a box, or a store. It’s an idea. Before you pick out paint, new kitchen appliances, or the latest in bathroom fixtures, you’ve got to get your Offer to Purchase on the house accepted. It’s  seller’s market in South Central Wisconsin where Necessity has once again proven to be the Mother of Invention. Her latest creation is the “Price Escalation Clause” and it’s a powerful idea.

Here’s how it works: House comes on the market at $300,000. Buyer A makes an offer for $300,000. Buyer B offers $310,000. Buyer C, knowing nothing about the other offers, is determined to get her offer accepted. She’s qualified to purchase up to $350,000, and this house is perfect for her. Buyer C writes her offer  as a Purchase Price of $298,000, with a clause to escalate her price if the seller has any offers for more money than the $298,000 she offered, to a price of $1,000.00 higher than any bona fide offer, with a maximum purchase price of $315,000.  Seller likes all of  the offers but likes $315,000 best. Buyer C goes from 3rd best offer to Accepted Offer because she let the seller pick the price, provided it was only $1,000 more than any other offer and not higher than $315,000.

Pretty easy right? Maybe not. Real estate brokers and lawyers recognizing the opportunities for foul play crafted  contingencies which may be more complex than necessary. Everyone has an idea and it seems every idea is incorporated into one of the dozens of versions of an escalation clause. Typical of first generation vehicles, these non-uniform contingencies are overbuilt and cumbersome to navigate.

Here’s a simplified price escalation clause  to help you understand the concept. Check with an attorney before using a version of any escalation clause. This one is only for an example, not to be used in your offer.

The purchase price of this Offer shall be $1,000.00 greater, up to a maximum price of $_________(a), than the purchase price of any bona fide offer the seller has received at the time of acceptance of this Offer.  Along with this accepted Offer, Seller shall send written notice to buyer stating the purchase, which shall be no more than $1,000.oo more than said bona fide offer and not more than $___________(a). Buyer and seller agree to promptly execute an amendment to state the purchase price as the amount given on said Notice from Seller to Buyer.

Broker and lawyer crafted contingencies call for the seller to provide the buyer a copy of the competing offer to prove the purchase price of the other offer. You’ll even see the term Net Price used to account for credits and concessions before calculating the escalating buyer’s offering price. Both conditions are good ideas. Whether or not they are necessary depends on the buyer. I believe the need for proof of existence of other offers is overblown, and calculating Net Price is splitting hairs.  Everyday as long as there have been more than one buyer for a property, buyers have offered more money than they might have otherwise, because they knew or thought another offer was coming in to the seller. Never, ever do those buyers require proof that their offer wasn’t already better than the one that did or did not come in. I believe in requiring the sharing of competing offers, we’re are adding a solution where no problem exists.

The easiest offer for a seller to accept is one that is easy to understand, and includes a  preferred price. Keep it simple and legal to have a better chance of being the next owner of the home of your  dreams….oh yes, there is still the issue of appraising for the purchase price. Seller’s be careful…make sure you are protected against appraisals below that escalated purchase price. Appraisers and underwriters are not as inspired as buyers and sellers to put unsupported values on properties.

Always use an attorney to review your contracts.