Remember, you’re driving the bus & I’m next to you as your navigator! My job as your agent is to provide you with the various routes that you can take but you’re the driver making the decisions that are best for you! Ideally you’ve been reading my posts, watching my videos (& others) and taking the time to learn the home buying steps so that when you’re ready to submit an offer, you’re able to make a decision that you feel confident about!
When multiple offers are expected on a property one of the tools that we can use is an Escalation Clause. This is a document that is submitted along with the offer package. It states your starting offer but gives you an opportunity to increase your offer, by a set amount (increments), up to a maximum amount (cap).
Here’s an example:
List price is $279k and comparable properties lead us to believe that offers could go as high as 10% above the list price. You’ll want to use your mortgage calculator or get help from your lender to make sure that you understand the difference between the total monthly mortgage payment at different amounts. What is the monthly payment at $285k vs $305k? This will help you to decide if you’re ABLE to offer $305k. You’ll also want to look at comparable prices in the neighborhood–keeping in mind what it might appraise for, what the future value & equity potential is, and how close on a scale between 1 & 10 does it land on your scale (you can’t use 7—that’s the indecisive number, it’s either 8+ or 6-). This is how you will decide how much you’re WILLING to offer.
Here’s what the escalation looks like:
List price is $279k; we’re willing to increase our offer amount by $xxxx ($1k, $3k, $5k, $10k) over the highest offer up to $x amount.
Starting offer $279k
Increments of $3k
Cap: $308k
If the highest offer is $300k then your offer becomes $303k. However, if another buyer is willing to pay $309k then your offer is maxxed out at your cap of $308k. If the highest price is the determining factor then the Seller will go with the buyer that pays $309k.
WHY WOULD WE WANT TO SUBMIT AN ESCALATION?
Because we are in a very strong sellers market where most houses, in good condition, will have at least 3 or more offers (my listing at 15 Coes St North Providence had 12 offers!).
Here are some strong reasons to consider an escalation clause with your offer:
1) When there are multiple offers the sellers agent will call for “Highest & Best Offers”–you get one shot & we don’t have access to see what the other offers are. You hear about “Bidding Wars” but that’s not really how it works.–there isn’t usually back and forth.
2) The Escalation Clause is a written document that you will sign. Part of this clause states that the Sellers agent must provide written proof of the “Bona fide offer” that kicks in your escalation. This is so that we don’t just have to take the agents word for it that your escalation has been kicked in. So if the highest competing offer, per the example above, is $299k then your offer becomes $302k and they are supposed to provide us with proof of that offer—info will be redacted for the privacy of the competing buyer but again, this is an attempt at transparency.
3) It’s a drag to miss out on a house that your really like by a few thousand dollars so this allows you to cover your bases. Have I had people submit escalation clauses who haven’t had to go to their maximum amount? YES!! Many times!
Other questions:
1) Do we have to put in a cap/max amount: No. But I have had this strategy backfire before on a client. We hadn’t signed a contract so they weren’t in a position where they had to move forward–another buyer put in an escalation that went way over what we anticipated! I’ve also had it work as a strategy. We have to talk about all of the options to make sure we’re using the strategy that works best for you!
2) Should you start with the list price: yes but I do recommend that you set your increments at $2k or more (meaning that you would be $2k higher than the other most competitive buyer). Why higher increments? It depends on the house & the price point but you may be able to entice a seller to choose you over a similar buyer who perhaps has another more favorable contingency–maybe they’ve waived the inspection but you’re willing to pay $5k more than that buyer so they may be willing to move forward with you even though you have included an inspection contingency.
What else should do you need to know when submitting an offer? I have a video that cover this here. Watch it but here’s also an overview:
To make an offer I need to know:
- Purchase price
- Escalation & if so starting offer & maximum/cap & increments
- Will you include the inspection contingency
- Will you include the mortgage contingency
- Will you include the appraisal contingency & if so are you able/willing to Offer an appraisal gap
See also: What Are Contingencies blog post
Now that you’ve read through this let me know if you have any questions! It’s a lot to take in but it’s my hope that if you have the opportunity to read posts & watch videos you’ll be bette equipped to know what else I can do to ensure you understand your options & the process. I’m always here to help!