In our competitive real estate market, buying a Columbus home might feel like trying to win an Ebay auction! But that doesn’t mean you should approach home buying with an auction mentality. This is exactly what an “escalation clause” does. Let’s take a closer look at this controversial strategy, and why it can backfire on hopeful buyers.
An escalation clause works like this: if you expect a bidding war, an escalation clause automates your participation in that process, while setting a limit on the maximum you’ll pay.
For example, say the home price is $279,900, but you expect other offers will compete with yours. You might decide to offer $271,900, but throw in an escalation clause that incrementally bumps your offer above any other offers, not to exceed a total price of $285,000.
Your escalation clause might state you’ll pay $2,000 more than the highest competing offer. So, if another offer comes in for $274,900 – your clause automatically makes your new offer $276,900. In a case of multiple offers coming in over a single weekend, you might hit your maximum price of $285,000 fairly quick. Then, you either win the bidding war, or lose it to someone with deeper pockets – or lose to a buyer with a better purchase strategy!
Escalation clauses are never in the best interest of the home buyer. There are several reasons why this strategy sets you up for failure!
First, you are not making your best offer to the seller. Instead, you’re telling them, “I really want this house, and I’m willing to pay this maximum price, but only if somebody else coughs up more…” It makes you look sneaky. If you are confident of the market value and you truly want the home, why play games?
Escalation clauses can be easily forgotten, or even ignored by home sellers who are entertaining multiple offers. Your first offer for $271,900 is the one that’s getting compared to the competing offers! If you’ve baked in an escalation clause to make up for a weaker initial offer, it’s probably doomed to fail.
Worse, you’ve shown all your cards to the seller without negotiation. By using an escalation clause, the seller instantly knows you are able to pay $285,000! What’s stopping them from countering your escalation-clause offer with a buy-it-now price of $285,000? They may have been willing to take less, because they didn’t have any competing offers, but you’ll never know!
Which brings us to another point: a lack of transparency. The seller and seller’s agent do not have to tell you the details of any other offers. You don’t get to see what you’re up against; the seller merely responds to your offer by countering it, rejecting it, or accepting it.
Another complicating issue arises when the seller calls for the “highest and best offer” from every buyer, after receiving more than one offer. Sellers can respond in various ways, and with no clear protocol, it is a delicate situation.
If you desire to use an escalation clause, you must have expert home buying advice, and use specially-worded, written communications with the seller to avoid blindly over-paying! We have the expertise and the specifically-worded addendums to achieve your home buying goals.
There are many strategic ways to write your purchase offer! At Buyer’s Resource Realty Services, we give you expert guidance on local market conditions, and help you structure a compelling, competitive offer that protects your interests. You can see some examples by obtaining our free e-book, “How to Buy a Home like a Pro!”
As your Exclusive Buyer’s Broker, we serve your best interests at all times! Unlike real estate agents and brokerages who represent sellers, as an Exclusive Buyer’s Broker, we only represent you, the buyer, getting you the best price and terms with no conflict of interest at all times.
Understanding this distinction could literally save you thousands of dollars not only on the purchase price and terms, but also on seller concessions and home inspection issues, whether you are a first-time homebuyer or an experienced homeowner!
Contact us with your home buying questions! Remember, we are with you every step of the way…all the way home!
Andrew Show
Broker, CEBA-M, CNE, CSP, PSA, e-PRO, CREM, ABRM, AHWD
Buyer’s Resource Realty Services, www.buyershome.com
Serving Metro Columbus, Ohio with Exclusive Buyer’s Agents
7100 North High Street, Suite 204, Worthington, Ohio 43085
614-888-4110 | 888-888-4110 Toll Free | 614-839-4110 Fax
