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.
Here are some tips to make your purchase offer look better than your competition:
Submit a Large Earnest Money Deposit.
Pending home sales sometimes blow up. Many sellers are worried that once they commit to an offer, the winning buyers might back out of the transaction or default on the contract after all the other buyers have disappeared. The earnest money deposit will be credited to you and become a part of your down payment at closing. Typical earnest money is 1-3% of the offer price, but you can increase beyond what is typical to show the seller you are serious about closing. When Sellers see large earnest money deposits, they think "much stronger buyer here".
Sell Your Exiting Home First.
If you are moving up and have a home to sell, don't buy before selling. If you're a first-time home buyer, you might already have the advantage over a buyer who needs to sell before buying. If one offer contains a contingency of sale, the seller will gravitate toward the offer without a contingency to sell.
Show the Sellers You Are Qualified.
Almost every multiple offer will be accompanied by a lender letter. To stand out, ask your lender for a solid loan preapproval letter. Not one that says "preapproved" but no credit report has been done. And no verification of income, assets or employment has been asked for and offered. Being "completely" preapproved makes you a stronger buyer in the seller's eyes. Perhaps your loan representative can call the listing agent and play up your strengths. We have had good results with such a call in the past.
Give the Sellers Time to Move.
Buyer possession is often a sticky point. It's hard enough to juggle multiple closings if you are selling and buying simultaneously, and even more difficult if the sellers are doing the same. Cut the sellers some slack by giving them two to three days to move out after closing, without expecting compensation.
Shorten or Waive Some Contingencies.
By federal law, you have 10 days for inspections due to lead-based paint on homes built pre-1978, unless you waive that right in writing - read this pamphlet and discuss with us whether to conduct an inspection for lead-base paint. Always get a home inspection, but tighten the time period to have this accomplished. Talk to us about "pre-inspections". If your loan is solid, waive the loan approval contingency. Talk to us about comparable sales to decide if you want to waive an appraisal contingency. Offer to Bridge the Gap Between Appraisal and Sales Price. If you have a bit of extra cash, and you think the home might not appraise at the price you are offering and the seller will know this, then offer to pay the difference in cash.
Write Your Best Offer.
In a seller's market, don't hope for negotiation. Offer your highest price. The price you can live with should your offer be accepted. And one that you can feel that you did your best should your offer be rejected. Make it attractive, maybe a bit above list price, or maybe a lot above list price if there are several bidders. Ask us to provide you with comparable sales to determine pricing. Sometimes sellers deliberately set a price below comparable sales in an effort to generate multiple offers, so paying a little extra doesn't necessarily mean you are paying over market value.
Use Escalation Clauses.
An escalation clause can help you in many instances to have the winning bid without paying a lot more than the competing buyer. Check back next week for our blog on use of these escalation clauses.
Don't ask the seller to give you personal items. Don't expect the seller to pay your closing costs. Find out which items are customarily paid for by the seller and offer to pay a few such as title policies, escrow fees, transfer fees. Nancy and I try our best to befriend the seller's agent because sometimes sellers reject offers based on what the seller's agent has to say about your agent.
Find Out What's Important to the Seller.
Ask us to find out the hot buttons in the transaction. These could be seller requests or listing agent expectations -- ask what will seal the deal and give it to you. Maybe it's a fast closing. Maybe it's a longer than usual escrow period.
Share the Love.
Most sellers have an emotional attachment to their home and want to see it fall into the hands of an acceptable buyer. Be that acceptable buyer. Write the seller a brief letter explaining why you love the home and why you deserve to be chosen as the winning offer. Complement them on recent renovations, color choices or their landscaping. Be sappy but sincere.
Realize the listing broker represents the seller – and the seller's interests, and the buyer-representative represents the buyer – and the buyer's interests. Real estate professionals are subject to state real estate regulation and, if they are REALTORS® (as Nancy and I are), they subscribe to and follow the Code of Ethics of the National Association of REALTORS®. The Code of Ethics obligates REALTORS® to be honest with all parties; to present offers and counter-offers quickly and objectively; and to cooperate with other brokers. You may have used a non-REALTOR® in the past with very poor results. Many people do NOT know the difference.
You may not win your first experience with multiple offers. Keep your head up, and learn from any losing offers. We are here to support you and help you find the right home. In the meantime, make sure you're getting the most up-to-date listing information available by searching for homes on www.jackandnancy.com.