The Escalation Clause – Just (DON’T) Do It!

How can a Home Buyer WIN in a Multiple offer contest?

Here in Middle Tennessee, we’re fresh out of Housing inventory in many segments of our market. There are plenty of “Ravenously Hungry” Buyers out there watching the market like hawks and POUNCING on anything that appears in their sights.

It’s market conditions like these that give rise to increasingly creative strategies to WIN the next house that comes on the market.

Some REALTORS leak “Coming Soon” details about a new listing prior to going live in the MLS. This is a purposeful way to build excitement amongst the Buyers and to generate multiple offers. One of the dangers of this strategy is that, invariably, some agent or Buyer will push for early access . . . and then will attempt to get the house under contract before it goes LIVE in the MLS.

My personal issue with the “Coming Soon” strategy is that it fails to expose the listing to the entire market. In the event a Seller accepts an offer prior to actually being listed on the market, no one will EVER know what that house might have fetched if the whole market had had a shot at it.

In these very HOT segments of the market, virtually EVERY new listing that shows up yields more than 1 (and sometimes SEVERAL) offers. We call this a “Multiple Offer Scenario,” and there are myriad ways (Strategies) to approach them.

The Seller can define the “rules” and create as “Level a Paying field” as possible by defining a deadline for offer submissions – “5PM Monday” and putting all parties on notice that there are Multiple Offers.

Generally, this notification includes an opportunity for all of the Buyers making offers to submit their “Highest and Best Offer by 5PM Tuesday” at which time the Seller will consider all of the offers and render a decision Wednesday @ Noon.

You would think that with these specific guidelines. there’s not much room for game playing, but don’t ever underestimate the craftiness of ravenous Buyers and their agents who will try most anything to gain an advantage over the other offers 🙂

The Escalation Clause is one such “tool” which goes something like this:

“Buyer offers $1,000 above the next highest offer not to exceed $375,000”

While this sounds BRILLIANT on the surface, there are multiple issues with it:

  • Is this really a legal offer? There’s not a specific Price.
  • Will the seller be honest? What if the next highest offer is $372,000, but Seller says it’s $374,000?
  • How will the Buyer KNOW the seller is being honest? Confidentiality requirements negate the possibility of legally providing the proof (showing the other contract).
  • This scenario comes dangerously close to appearing to be an AUCTION which we REALTORS in TN are NOT licensed to do.

Here’s where the real mess ensues. Often after the victory party is over, the Buyer and Seller both develop some kind of pathological distrust in each other and the entire process.

In the back of their minds, both wonder if they got the best deal. The Buyer wonders if she over paid . . . and the Seller wonders if he could have gotten MORE.

The next phase of the process is the Inspection and resolution of said inspection. Invariably, this part of it turns ugly as the Buyer receives the report and then wonders (again) that in the thrill of the chase, she’s made a mistake . . . thinking that because she is paying TOP DOLLAR, this house had better be the Taj Mahal of houses with ZERO defects.

The Seller, on the other hand, isn’t all that concerned because he knows there are 4 other Buyers waiting in the wings and prayerful that this 1st deal will FAIL.

Then comes the appraisal . . . Did this escalation exercise result in a price that is so inflated that NO appraiser would be able to justify?

My personal (and company) policy is to advise Sellers facing multiple offers to create the level playing field and require ONLY “Highest and Best” submissions . . . a CLEAR and singular Price . . . Simply include on the Multiple Offer Notification that “No offers with Escalation Clauses will be considered.”

When the market is HOT, there are ALWAYS plenty of people in search of ways to build a better mouse Trap (or skin a cat).

I believe that the more complex we REALTORS allow these scenarios to play out, the more trust and good faith degrade.

So . . . Let’s keep it clean (and Legal) out there, eh?

Published by Barry Owen

Strategist-CEO of Pareto Realty Real estate sales Professional Inviter-Facilitator-Practicer of Open Space Technology Opening safe space for people & organizations to self-organize around issues & opportunities BarryOwen.US Invite-Listen-Love

Leave a comment

Your email address will not be published. Required fields are marked *