Our current local real estate market is not unlike many other markets around the US. We are seeing low inventory of homes for sale, and buyers who are clamoring for the same homes as soon as they hit the market. If you are one of those buyers, what can you do to help set your offer apart? Remove inspection contingencies. Close quickly. Offer a SOLID purchase price. Pay with cash. Remove home sale contingency. Write a letter pleading your case. Your REALTOR® will help you decide what you can do. These are all great things to consider. Your situation may not allow you to pay cash or remove certain contingencies, so what can you do in this situation? You may consider adding an “Escalation Clause” to your offer.
You are probably asking yourself, “What is an escalation clause?” Don’t worry… most people (and probably a lot of real estate agents) don’t know what it is either! An escalation clause offers you the ability to make an initial offer price on the property, and then tell the seller that you are willing to exceed any other offer price incrementally until you are the highest offer, up to a predetermined cap.
Are you scratching your head, saying… “What, the what?!” Let’s look at an example.
List price on a home is $199,000. You have been informed that there are several offers being made, and you really want the house. So, you are willing to offer the seller $205,000. In addition to this $205,000 you are pre-approved to purchase a home at $215,000 (and you are willing to go up to this amount if you need to in order to get this house.) In your escalation clause you decide that you will go above the highest offer by $1,000 until you are the highest offer. But, you will not exceed $215,000. If the highest offer comes in at $210,000 then you will pay $211,000.
Does that make sense? If not, call me. Maybe I can explain it better in person!
A note of caution. Do not use this clause with abandon. It shouldn’t be used to initially “low-ball” a seller, and if your financing requires that the property appraises for the purchase price, then you will want to consider your “top end” cap, and not go too crazy with that. In the end, listen to your REALTOR® and the advice that they give you.
Now, I want to speak to the sellers out there. When considering multiple offers and offers with escalation clauses attached to them, don’t forget the other terms of the contract as well. You may have an offer that is comparable to the one with the escalation clause in price, but it doesn’t have financing or inspection contingencies… that could be worth WAY MORE than a few hundred or thousand dollars in the long run! Lean on the experience and expertise of your REALTOR® when deciding which offer to accept.
The takeaway here is that it is important to have your REALTOR® assist you in making and negotiating the best offer possible. Good luck buying and selling!