Brought to you by Scott P. Rogers, Funkhouser Real Estate Group, 540-578-0102, scott@HarrisonburgHousingToday.com
Brought to you by Scott P. Rogers, Funkhouser Real Estate Group, 540-578-0102, scott@HarrisonburgHousingToday.com
Friday, August 21, 2020
If you are trying to buy a home in a price range (under $250K) where there are often (usually?) multiple offers on the table, you may find yourself considering the use of an escalation clause.
What is an escalation clause, you might ask?
An escalation clause allows you to offer one price but then to effectively increase your offer price to be above any other competing offers.
Consider the following scenario on a house listed for $225,000
- Offer 1 = $225,000
- Offer 2 = $227,000
Offer 2 wins, right? Probably so.
But if the first buyer didn't want to pay more than the asking price if they didn't have to -- but if they would have been willing to pay up to $230,000 -- then things could have worked out differently...
- Offer 1 = $225,000 with an escalation clause to increase the offer to be $1,000 above any other offer up to a maximum of $230,000
- Offer 2 = $227,000
In this situation, Offer 1 becomes an offer of $228,000 and likely is the chosen buyer instead of Offer 2 which is then $1,000 lower.
But let's add a layer here -- the financing contingencies...
- Offer 1 = $225,000 with an escalation clause to increase the offer to be $1,000 above any other offer up to a maximum of $230,000, contingent on the buyer financing 97% of the purchase price.
- Offer 2 = $227,000, contingent on the buyer financing 80% of the purchase price.
I see this type of scenario play out quite regularly.
In many cases, the seller is will choose to move forward with Offer 2 - even though it is $1,000 less than Offer 1.
Why, you might ask?
Buyer 2 seems to be better qualified to buy the home, with a larger down payment. This will likely be to the seller's advantage when it comes time to negotiate the home inspection (a buyer with more cash available is less likely to be worried about small repair items) and the appraisal (a buyer with more cash available is likely more willing/able to come up with an extra $1K if the appraisal is slightly low).
So, if a buyer has some other terms (financing, inspection, timing, etc.) that are possibly or likely to be less favorable to the seller, said buyer might consider leveraging their escalation clause a bit, such as the following...
- Offer 1 = $225,000 with an escalation clause to increase the offer to be $2,500 above any other offer up to a maximum of $230,000, contingent on the buyer financing 97% of the purchase price.
- Offer 2 = $227,000, contingent on the buyer financing 80% of the purchase price.
In this scenario, Offer 1 becomes an offer of $229,500 compared to Offer 2 which is an offer of $227,000. This will cause the seller to think a bit longer and harder about whether they really want to go with Offer 2 that has the more favorable financing contingency.
Think strategically when you are crafting your offer -- and your escalation clause -- knowing that a seller is looking at all of the terms of your offer, not just the offer price.
