Handling Escalation Clauses
1:54 Minute Read.
I hate escalation clauses. I don’t like receiving them, I don’t like sending them. But in this demanding seller’s market, they are an established part of the negotiating process. Last week, one of our listings was on the market for 2 days, had 50 tours and received 28 offers – many with escalation clauses.
What’s an agent to do?
If you have a better, savvy idea on how to handle them, I’m all ears. Send an email and let’s talk about it. However, the advice I offer our agents is ignore them.
“Escalation clauses reveal what buyers are really
willing to pay – so, let them.”
Buyers show their hand too easily when they reveal their upward limits on purchase agreements. If they are willing to escalate to “X”, then why not simply counter-offer at “X”?
When presenting these kinds of offers to sellers (and explaining the downside to buyers when representing them) I educate clients on a simple 5-step process:
First, give every buyer’s agent a chance to present their best offer. A simple email sent to all agents puts them on notice you are calling for the highest and best from each buyer. And besides, every seller needs that confidence in knowing you’ve done your best job in securing the highest offers possible.
Secondly, look beyond the strength of an offer and consider the strength of the buyer as well. Most agents agree that buyers flush with cash may be stronger than someone needing a zero down loan with concessions and a contingent house for sale.
Thirdly, create two net sheets for each written offer containing an escalation clause – one for the actual value of the offer, the other indicating the value of it’s higher, escalated counter offer.
Forth, use common sense. Consider what an appraiser would think of the amount. Warn your client of the possibility of an appraiser dampening the transaction due to a lower appraised value.
And fifth, once your seller decides on an offer, call the buyer’s agent, explain the situation and ask if their client is interested at the higher price and willing to sign the counter offer – and ignore that pesky escalation clause.
And a couple extra notes…
Listing Agents – While its OK to offer advice to a client, the final decision always rests with the seller. Don’t put too much pressure on yourself deciding which offer will be best. You cannot know the future. Offer your best advice and leave the decision – and pressure – on your client.
Buyer Agents – To protect your client who demands using an escalation clause, I recommend adding a contingency of the home appraising at or above appraised value. Hopefully, that can protect them from doing something foolish.
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