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Escalation Clauses Versus Terms 

What is the best approach in a seller's market?

In a market that is incredibly tight with buyers competing for properties, how does one compete to get an offer accepted? One tactic is the escalation clause. The escalation clause, also called an escalator, is language inserted into an offer that states that the buyer will pay a specific dollar amount over the highest offer the seller receives in a multiple-offer situation. The clause generally includes a cap to ensure that the buyer does not offer to pay more than they can afford. The question is, will that escalation clause alone guarantee an accepted offer?

Using an escalation clause is not a guarantee that a buyer's offer will be accepted, and, in some cases, sellers will not accept an escalation clause. If an escalator is not a guarantee, then what is the best approach when writing an offer?

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Terms are key points to an offer, particularly in a market such as the one we are experiencing now. It isn't always just about the money. For example, perhaps a seller needs a longer escrow in order to move that antique book collection or in some cases needs to occupy the property after closing with a short rent-back agreement while they wait for construction to be completed on their replacement home.

There are many things that can be attractive to a seller when reviewing offers. It's important that a buyer and the buyer's broker take the time to learn what is important to the seller. Ask questions like, what duration of closing is preferred by the seller? Does the seller want a 30-day closing or do they prefer longer?

Another thing to consider is the home inspection contingency. Some buyers opt to waive the contingency all together, while another tactic can be to shorten the duration of the inspection period and writing in the offer that the buyer will not ask for any repairs that are discovered in the home inspection up to a specific dollar threshold. For example, a buyer waiving all repairs up to $3,000. This gives the seller some peace of mind that there will not be any unexpected costs or renegotiation of the purchase price.

Another contingency that can be addressed to make an offer competitive is the appraisal contingency. With the market being as competitive as it is, offers that are well over the listing price are becoming commonplace. When a buyer is willing to pay over list price, that doesn't guarantee that the property will appraise at that price—so the buyer can waive the appraisal contingency and agree to make up the difference with their own cash between the appraised price and the contracted purchase price. This only applies to purchases that are being financed with a mortgage.

While an escalation clause can be a useful tool, it is critical that a buyer consider terms beyond the purchase price. A strong offer will address not only the purchase price, but also the contingencies in a manner that allows for a buyer to do their fair due diligence, all while providing the seller the peace of mind that the transaction will close successfully with little to no surprises.

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