Using An Escalation Clause Do’s and Dont’s

Using An Escalation Clause Do’s and Dont’s

I am shocked when agents whom are not listing agents say they don’t like to use an escalation clause or say something like what the image below says.

AgentCampus-Q3-blog-2-1024x661For non-agents reading this I will define an escalation clause for you. In what is referred to as a “sellers market” a common occurrence is to have multiple offers on a single home. We are currently in a sellers market and many towns in MA are having a feeding frenzy with regards to offers. When putting in an offer to compete with a multitude of other offers an agent could choose to use an escalation clause. This states that you agree to place an offer that is $X amount over the highest offer received. Similar to proxy bidding that ebay had years ago.

Example: Four offers come in on a property. One is at $501k, another at $490, another at $505 and finally yours. I have seen situations where agents submit based on hype and feeding frenzy mentality. The client says I lost the last 4 bidding wars, but not this one. Place a bid at $575. They just paid $70k over the highest bid. Same scenario with an escalation clause. Lets place an offer with an escalation that says you will pay $5k over the highest bid received. You lost the last 4 bidding wars I know you want this and I will make sure you get it. Under this scenario you would pay $510 not $575. Saving you $65k. It pays to have an experienced agent working for you.

Some other hints. If your agent is savvy enough to use a escalation clause do not let them place a cap on the escalation. Placing a cap is like placing a bid. The sellers agent is not bound to produce the highest offer, they simply have an ethical and moral decision to make. As we all know agents aren’t well known for having great ethics nor morals. If you placed a cap at $550k in the above situation. An unethical selling agent who is trying to get top dollar for their client, could say “we have another offer at $545”. When $505 was really the top offer. You can ask for them to produce that offer, but they are not legally bound to do so. The best way to place that offer is with an escalation with $5k over highest bonafide offer. This way bonafide will give you a legal reason to view the other offer. I have another trick I put in my escalation clauses as well, but I will keep that in my left coat pocket. Feel free to give me a call if you want to know what it is. In this crazy competitive market I have not lost a bidding war yet.

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