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
Tuesday, March 1, 2022
If you are making an offer on a house in 2022 there is a decent chance there will be other offers on the property as well. As such, 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 $350,000
- Offer 1 = $350,000
- Offer 2 = $351,000
Offer 2 wins, right? If all the other terms were identical, then 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 $360,000 -- then things could have worked out differently...
- Offer 1 = $350,000 with an escalation clause to increase the offer to be $1,000 above any other offer up to a maximum of $360,000
- Offer 2 = $351,000
In this situation, Offer 1 becomes an offer of $352,000 and likely is the chosen buyer instead of Offer 2 which is then $1,000 lower.
But let's add a layer here -- contingencies...
- Offer 1 = $350,000 with an escalation clause to increase the offer to be $1,000 above any other offer up to a maximum of $360,000, contingent on the buyer financing 95% of the purchase price, contingent on a home inspection and contingent on an appraisal.
- Offer 2 = $351,000, contingent on the buyer financing 80% of the purchase price, no home inspection, no appraisal contingency
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.
Buyer #1 might have thought their escalation clause would do the trick and ensure they get to buy the property -- but that is not likely to occur.
Why, you might ask?
Buyer 2 seems to be better qualified to buy the home, with a larger down payment, plus they do not want to do a home inspection and they won't try to renegotiate after an appraisal.
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 = $350,000 with an escalation clause to increase the offer to be $5,000 above any other offer up to a maximum of $360,000, contingent on the buyer financing 95% of the purchase price, contingent on a home inspection and contingent on an appraisal.
- Offer 2 = $351,000, contingent on the buyer financing 80% of the purchase price, no home inspection, no appraisal contingency
In this scenario, Offer 1 becomes an offer of $356,000 compared to Offer 2 which is an offer of $351,000. This will cause the seller to think at least a bit longer and harder about whether they really want to go with Offer 2 that is more favorable from a contingency perspective.
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.
