Escalation Clauses: Just Say No

Selling

06/26/17 | Liz Lyster

In a competitive seller's market (which is exactly what we have in the Greater Boston area), buyers sometimes write escalation clauses into their offers. But when we're working with sellers, we recommend that they not consider offers with an escalation clause. We will explain why we avoid them, but first let’s talk about what an escalation clause is, and how it works.

What it is

An escalation clause essentially states: “I am offering to pay $____ for this property. If another buyer offers more, I’ll beat that offer by $____, with proof of the competing offer, but the highest I’m willing to go is $____.”

How it works

A house is on the market for $500,000. A buyer makes an offer of $500,000 and adds an escalation clause that guarantees that she’ll beat any offer by $1,000 as long as the total price is lower than $520,000. This buyer is using the escalation clause to bolster her chances of getting the house; simply put, she’ll beat any price up to $520,000.

With an escalation clause, you just might leave money on the table. Say your house is on the market for $500,000. You receive multiple offers with escalation clauses—the highest any of them will go is $520,000. You sell your house for $520,000.

Without escalation clauses, it's a different story. Your house is still on the market for $500,000. You get multiple offers, but because you are not allowing escalation clauses, the buyers have to truly put in the best possible offer they can manage. This makes them willing to put up more cash. Boom. You sell your home for $550,000. Or more.

Why we don’t recommend that sellers accept escalation clauses:

Simply put, Ellie and I believe that escalation clauses can force the seller to accept a lower price for your home.
We want each buyer to submit the best offer they can; not play a version of cat-and-mouse with incremental increases.

As a seller, you will sign a listing agreement with your agent. You have three options regarding how you want any offers on your property disclosed to buyers:

Your broker may not tell potential buyers about the existence of any other offers.
Your broker may tell potential buyers that other offers exist, but may not give any details about those offers.
Your broker may tell potential buyers both about the existence, and the terms, of any/all, offers on the property.

Ellie and I suggest our clients choose #2. This allows us to build excitement about your listing by disclosing the existence of other offers. (Sometimes we have more than a dozen offers on a home—recently we had 18!) However, by not publicizing the proposed offer amounts, buyers are encouraged to create the best possible offer, which tends to push the offer amounts up. You often receive the strongest, most straightforward offers this way, and can move forward with the sale of your home without the hassle of analyzing and breaking down escalation clauses.

The bottom line? If you consider offers with an escalation clause, you risk leaving money on the table. Don’t do it!

If you have additional questions or want to get started selling your home, please contact Ellie and me. We’re here to help.

#escalationclause #sellers #offer

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With their complementary communication styles, responsiveness, competence, and ability to truly listen, Ellie and Liz enable their clients to feel at ease throughout any real estate transaction. They would welcome the opportunity to be your next real estate advisors.

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