OK, I have nothing against escalators, at least not the ones that get you from Ladies Handbags to Housewares at Bloomingdales. But when you are planning a strategy that will win a bidding war, so called “escalator clauses” are tool that’s a necessary evil to win your next home.
In the real estate context, it means using the listing price as the jumping off place when crafting an offer. Many properties are priced just below what the listing agent and seller feel is the market value of the home. With luck, the seller will see the price bid up, sometimes way up, by buyers participating in a bidding war.
A typical escalator clause will have two important pieces, with the buyer basically saying, “OK, here is a full priced offer. But if someone comes in will a higher number, I will up the ante on mine to whatever the higher offer may be, plus a little more.” Almost all of the offers will have a cap on how high each buyer will go with an increment of anywhere from a few thousand dollars to a lot more over the competitions’ caps.
So, let’s say we’re talking about a house with 10 sets of buyers making offers. The first thing the listing agents does is to sort them based on the capped price, from highest on down. Suddenly, the adjusted offering prices increase, often by an astonishing amount of money. Then the sellers look how much over the other offers’ caps each buyer is willing to go to get the final numbers on each offer. Finally, they will look at the non-price related terms of each offer.
But here’s the rub.
The price is not the most important element of an offer – those non-price terms can render a high price unattractive to the smart seller. If you a buyer who is not contingent on financing, an appraisal, a home inspection or Senate confirmation on your job with the new administration, your offer is inherently more attractive to a seller who wants a strong likelihood of your showing up at the settlement table. Still, if you have a clean offer with an escalator clause and another buyer comes in with a higher number but a lot of risks for the sellers to assume, the dirty offer could be used to turn on the switch that activates your escalation clause.
Then there is the monkey business factor. Yes, sellers and listing agents have been known to cheat with escalators. You should never agree to an escalator clause that does not include the requirement that the sellers’ agent provide a copy of at least the offer that was the runner-up to yours. And if your offer is very clean, you might want to add language that requires the offer that is used to establish your final price be free of all or most contingencies. Of course, prudence can cost you the house!
Escalators in bidding wars are the main drivers in the rapidly increasing prices for homes in the DC Metro area, and it’s the buyers who are willing to participate who are making “affordable housing” an oxymoron. But the fact that everyone seems to be doing it is creating situations where buyers feel they must use this tool in crafting an offer.
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