Escalation Clauses - A Home Buyer's Secret Weapon
Today we discuss escalation clauses because much of the country
is experiencing an extreme "sellers' market." By that, I mean
there are more buyers than there are sellers, and that results
in sellers' getting more than one offer to buy their property.
The seller can be picky about the terms under which he is
willing to sell. A potential buyer is apt to make one or more
offers which are rejected before making a successful offer. If
you are a buyer, how do you increase the chances that your offer
will be the acceptable one?
The obvious things a buyer can do is to have a strong
"pre-approval" lender letter, and make an offer that is full
price and is as "clean" (has as few contingencies) as possible.
Is there anything a buyer can do beyond that? You bet your bippy!
Escalation Clauses
A buyer who really wants to buy a property can do the above,
plus add an "escalation clause." An escalation clause simply
states that the basic offer is full price, but if the seller
receives one or more other offers at full price or higher before
this offer is accepted, then this offer is increased by $500,
$1,000, $5,000 (or whatever figure you choose) above the other
acceptable offer. Of course, you choose the amount of the
incremental increase based on what you think it'll take to get
the sellers' attention given the original asking price of the
home.
Now, I can hear you thinking, "That's all very well. I can see
where that'll get me the winning bid, but how do I make sure
there really is another contract? More importantly, how do I
make sure I can afford the home? Isn't this awfully open ended?"
Yes, it is. So let's fine tune the escalation clause idea a bit.
First, make the escalation offer such that it will increase the
sellers' net proceeds (not gross proceeds) by $500, $1,000 or
whatever. That way, your price is not artificially increased by
a higher offer that includes a provision for the sellers to pay
some of the costs that are normally born by the buyer.
Secondly, name an upper limit to which your offer can be
carried. For example, your offer could state that you will pay
the sellers an amount that will increase their net proceeds by
$10,000 above any other acceptable offer up to a total price of
$1,500,000. That puts a cap on how high you're willing to go.
Prior to making an offer like this, be sure to have a conference
with your lender to be sure you qualify for the highest amount
required by your offer. Obviously, you also need to be sure you
know and can pay the mortgage payments on that amount. It's also
a good idea to get a lender letter for this higher amount, so
that the sellers will be confident you can do what your offer
says you're willing to do.
The third bit of fine tuning is to require that the seller
provide you with a copy of the acceptable competing contract as
signed by the other potential buyer. Make sure the "buyer" isn't
a relative of the seller! With the written offer on hand, you
can be sure everything is on the up and up.
In this hot sellers market, escalation clauses can be the key to
closing a deal on your dream home. If a seller is motivated by
greed, you will have them dead to rights.