Author Topic: Escalation Clause  (Read 1722 times)

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Offline SeeksIrvineHome

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Escalation Clause
« on: March 31, 2021, 11:04:29 AM »
In this market would an escalation clause help or hurt the offer?
How do you know if the seller's agent is being honest about the highest offer or can they just fabricate the amount forcing the potential buyer to pay top dollar?

Pros Cons?

Any real life experiences with an escalating clause?
« Last Edit: March 31, 2021, 11:18:59 AM by SeeksIrvineHome »

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Re: Escalating Clause
« Reply #1 on: March 31, 2021, 11:20:54 AM »
Most realtors (small R's) would not understand how such a thing works, confusing the gatekeeper in this case as well as the seller.  I'd avoid using one. From all the recent articles about this sales environment, it's not always price but convenience plays a big part in the decision process.

My .02c
My .02c

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Offline Kenkoko

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Re: Escalation Clause
« Reply #2 on: March 31, 2021, 11:30:54 AM »
In this market would an escalation clause help or hurt the offer?
How do you know if the seller's agent is being honest about the highest offer or can they just fabricate the amount forcing the potential buyer to pay top dollar?

Pros Cons?

Any real life experiences with an escalating clause?

Be very wary if it's a dual agent situation.

My real life experience was as the seller a few years ago on an investment property.

I had 3 offers at 480k listing price. The 3rd offer was using my agent (a first time homebuyer) and it had an escalating clause of 3k.

Ended up selling the condo for 494k.

It worked out great for me as the seller obviously, but it's my speculation that my agent manipulated the situation.

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Offline USCTrojanCPA

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Re: Escalation Clause
« Reply #3 on: March 31, 2021, 11:52:54 AM »
Have the listing agent provide written proof of the offer/counter along with that buyer's proof of funds and/or loan pre-approval.  I've heard of agents asking their friends/colleagues to write up fake offers/counters to help juice up prices in these situations.
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Offline USCTrojanCPA

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Re: Escalation Clause
« Reply #4 on: March 31, 2021, 12:05:03 PM »
Here's the escalation clause language that I use for my buyer counters....

Purchase price to be $X but Buyer agrees to increase the purchase price to be $Y higher than the highest offer/counter-offer up to a maximum purchase price of $Z, subject to the Seller providing written verification of such offer/counter-offer along with confirmation of that buyer's qualifications (POF and/or loan pre-approval letter). 
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Offline USCTrojanCPA

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Re: Escalation Clause
« Reply #5 on: March 31, 2021, 12:08:00 PM »
In this market would an escalation clause help or hurt the offer?
How do you know if the seller's agent is being honest about the highest offer or can they just fabricate the amount forcing the potential buyer to pay top dollar?

Pros Cons?

Any real life experiences with an escalating clause?

There is a no-lose possible win situation in my opinion.  Some agents will push back and say that they won't accept an escalation clause counter (those are ones that don't understand it or don't want to work with it) and just want a purchase price on the counter.  The buyer on my 63 Berna listing in Baker Ranch used an escalation clause where they would offer $2,000 more than the highest offer and after providing them the relevant information for the 2nd buyer they wrote up a counter that was $2,000 higher than that buyer.
Martin Mania, CPA
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Offline USCTrojanCPA

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Re: Escalation Clause
« Reply #6 on: March 31, 2021, 12:09:48 PM »
Most realtors (small R's) would not understand how such a thing works, confusing the gatekeeper in this case as well as the seller.  I'd avoid using one. From all the recent articles about this sales environment, it's not always price but convenience plays a big part in the decision process.

My .02c

+1 Terms matter as well....are you waiving certain contingencies right off the bat (loan, appraisal, etc)?  How soon are you lifting all contingencies?  Are you buying the home on an "as-is" basis where you won't request the seller to make repairs or ask for credits in lieu of repairs?  Are you willing to provide a free or discounted rent back to the seller post-close?  How clean and concise is your offer to the seller? 
Martin Mania, CPA
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Offline zovall

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Re: Escalation Clause
« Reply #7 on: March 31, 2021, 12:26:06 PM »
I think it is a great tool for buyers to use in this market. USC's example above is very helpful.

So crazy but there are situations when a max price is not set on these. That can be a doubled edged sword though by raising caution in the seller.

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Offline talkirvine

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Re: Escalation Clause
« Reply #8 on: March 31, 2021, 04:56:45 PM »
What if there are two buyer using the same escalation clause? Which one should the seller sells to without potential legal issues afterwards.

Are sellers or their listing agents obligated to disclose the sale price and conditions in the accepted offer if asked for by the other bidders?

Offline sleepy5136

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Re: Escalation Clause
« Reply #9 on: March 31, 2021, 05:00:18 PM »
Am I the only one that feels that if we are in the market where escalation clauses become a tool to use for each offer you put out that its a market to get out of?

Offline qwerty

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Re: Escalation Clause
« Reply #10 on: March 31, 2021, 05:20:37 PM »
Am I the only one that feels that if we are in the market where escalation clauses become a tool to use for each offer you put out that its a market to get out of?

I would agree with this. Everyone says it’s hard to time the market and I definitely agree with that. But sines signs are too obvious to ignore. Although it’s easy for me to say since I’m already a homeowner.

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Offline USCTrojanCPA

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Re: Escalation Clause
« Reply #11 on: March 31, 2021, 06:27:47 PM »
Am I the only one that feels that if we are in the market where escalation clauses become a tool to use for each offer you put out that its a market to get out of?

There's not need for an escalation clause if there aren't multiple offers on a home.  The escalation clause helps the buyer not overbid for a home and when used with a limit it's a good option.
Martin Mania, CPA
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Offline sleepy5136

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Re: Escalation Clause
« Reply #12 on: March 31, 2021, 07:48:07 PM »
Am I the only one that feels that if we are in the market where escalation clauses become a tool to use for each offer you put out that its a market to get out of?

There's not need for an escalation clause if there aren't multiple offers on a home.  The escalation clause helps the buyer not overbid for a home and when used with a limit it's a good option.
Correct, but aren't we in a market where all homes are getting multiple offers? Assuming the home is priced correctly.

Offline kpatnps

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Re: Escalation Clause
« Reply #13 on: March 31, 2021, 08:15:17 PM »
In this market would an escalation clause help or hurt the offer?
How do you know if the seller's agent is being honest about the highest offer or can they just fabricate the amount forcing the potential buyer to pay top dollar?

Pros Cons?

Any real life experiences with an escalating clause?

Be very wary if it's a dual agent situation.

My real life experience was as the seller a few years ago on an investment property.

I had 3 offers at 480k listing price. The 3rd offer was using my agent (a first time homebuyer) and it had an escalating clause of 3k.

Ended up selling the condo for 494k.

It worked out great for me as the seller obviously, but it's my speculation that my agent manipulated the situation.

I would imagine your agent showed you all the offers/counter offers.  If so, I would imagine it would be pretty clear if it was manipulated or not.  Regardless, this example shows clearly that these escalation clauses can easily be manipulated. 

Agree with sleepy and qwerty about the state of this market.

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Re: Escalation Clause
« Reply #14 on: March 31, 2021, 09:14:10 PM »
In this market would an escalation clause help or hurt the offer?
How do you know if the seller's agent is being honest about the highest offer or can they just fabricate the amount forcing the potential buyer to pay top dollar?

Pros Cons?

Any real life experiences with an escalating clause?

Be very wary if it's a dual agent situation.

My real life experience was as the seller a few years ago on an investment property.

I had 3 offers at 480k listing price. The 3rd offer was using my agent (a first time homebuyer) and it had an escalating clause of 3k.

Ended up selling the condo for 494k.

It worked out great for me as the seller obviously, but it's my speculation that my agent manipulated the situation.

I would imagine your agent showed you all the offers/counter offers.  If so, I would imagine it would be pretty clear if it was manipulated or not.  Regardless, this example shows clearly that these escalation clauses can easily be manipulated. 

Agree with sleepy and qwerty about the state of this market.

They can be if the agent is dishonest and the buyer agent doesn't get verification that the offer/counter used to escalate the price higher is a legitimate offer/counter from a real buyer.  I won't take a listing agent's word, I'll want to see the offer/counter along with the proof of funds and/or loan pre-approval letter.

What is happening in the market is just about everywhere....Irvine, the rest of Orange County, most all parts of CA, Vegas, Arizona, Utah, Idaho, Texas, Florida, Nashville, Atlanta, etc.  The only larger market that isn't on fire is NYC. So what is going on is real and not froth.  It reminds me of what happened in late 2012 to the end of 2013 when prices rose about 20%.  At some point, we will calm down and get more to a balanced market but that won't happen until prices go higher and/or interest rates go significantly higher and/or we get significantly more supply.
Martin Mania, CPA
AgencyOne
CA BRE License # 01799007
CA CPA License # 107675
mmania001@yahoo.com
714-747-3884 cell

Often imitated....Never duplicated!

 

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