Last week we spoke of ways in which to make your offer more appealing to the seller. One of those ways was to include an "escalation clause". Here in the Puget Sound area, there is a form that can be added to a purchase contract to help ensure that yours is the winning bid. It's called an escalation clause, or NWMLS Form 35E. An escalation clause is just that — a clause that escalates the offer price, as needed, to win the deal. It is used to try to squeeze out all competition in a competitive bidding process. And it can save you from paying a lot more than the competing buyer is willing to pay.
For example: Say you have found a property that is perfect for you and you are considering making an offer. We would, as your buyer's agent, reach out to the seller's agent to let them know an offer is coming. The seller's agent might then indicate that they have interest from several buyers, and this will most likely be a multiple-offer situation. We would then try to determine whether, and how many, written offers have been received and on what date and time the seller intends to review these offers. We might then discuss with you whether your offer should include an escalation clause.
Of course, escalation clauses aren't right for every buyer. If you are struggling to come up with a down payment or are having a tough time securing a mortgage, staying within a set budget is essential. And you should never offer to pay more for a home than you are comfortable with.
But if you have the extra cash and really want the property, here's how it works: You would submit your offer for a certain price. We would write the escalation clause to increase the offer price by pre-set increments up to the maximum you would be willing to pay in order to beat out any competing bids.
So, say the offer on the property is $500,000. The escalation clause might allow for the price to go up in increments of $5,000 up to a maximum of $550,000 to beat any other offers. That means that if another offer comes in at $515,000, the offer with the escalation clause will automatically go to $520,000 in order to beat it. Prior to setting an increment amount, we would have a discussion with you about your strengths and weaknesses as a buyer of this property. The weaker a buyer you are, the higher your increment level should be. For example, a buyer who is financing with no money down is much weaker than a buyer with a down payment who, in turn, is weaker than a buyer paying all cash Even though, in the end, the seller gets all of the asking price with your financing, the more you put down the easier it is for the lender to arrange your financing. Sellers are aware of this and they take this into consideration when choosing an offer. A seller may take a lower offer from a stronger buyer. A buyer adding a lot of contingencies or asking for a longer closing date than normal might also be considered a weaker buyer.
Once your offer is accepted, and for your protection, the seller must provide a copy of the competing offer (with personal information redacted) as proof of the offer being escalated against.
Please contact us if you have additional questions regarding the use of this clause.