Escalation often has a negative connotation. For example, "There is an escalation of tensions in the world..." and "there has been an escalation of this issue to Human Resources". Yikes, escalation can be negative...
But in Real Estate, it can be a real positive for both buyers and sellers!
Let the guys at Live Frederick . Sell Frederick tell you why!
From a sellers perspective, escalation typically means that one or more buyers is escalating their offer over the seller's asking price. In today's competitive low inventory market, it can often be a great strategy to price your home below market value so that buyers may "bid up" the price and engage in a "bidding war". Remember, as a seller, you are under no obligation to accept any offer that is not acceptable to you, so the risk of pricing lower than market value is not egregiously high. Therefore, a below market pricing strategy can be extremely compelling and you should discuss with your listing agent the merits of all pricing strategies before listing.
In our experience, when sellers get multiple escalating offers, they don't just get a higher price but they also get better terms. Better terms can most easily be defined as receiving an offer with fewer and shorter contingencies. Sellers may also be able to achieve their ideal settlement date and even free rent backs from the buyer. It is uncanny (and we see time and time again), in multiple offer situations with escalations, sellers typically get incredibly attractive offers and terms. With all the emotions that come with selling a home, the serenity of better terms can be as important to some sellers as price.
From a buyer perspective, an escalation clause is extremely effective because it reduces the risk of "outbidding yourself". Practically speaking, an escalation clause allows the buyer to increase their offer to a specified "cap" with a specified "increment". For example, lets assume there is a $300,000 asking price and multiple offers: if you are willing to escalate to $320,000 in $3,000 increments, you are telling the seller that your "cap" is $320,000 and you will escalate $3,000 above the next highest net offer. Let's assume another offer nets the seller $310,000. This would automatically escalate your offer to $313,000 and you would win the deal. So in this example, instead of going all the way to your cap of $320,000, you win the deal for only $313,000. This truly protects the buyer from bidding drastically and unnecessarily higher than the next highest bidder!
Our clients typically have the following questions:
1) How do we know the seller actually received another offer that caused ours to escalate?
Answer: The Purchase Price Escalation Addendum in Maryland reads, "In the event seller shall elect to sell property to buyer, seller shall: Attach to this addendum written evidence of the offer which seller desires to accept in the form of a proceeds net sheet signed by the seller and containing an analysis of the net proceeds from the other offer..." In layman's terms, this means the seller needs to provide proof of the other offer that caused your offer to escalate.
2) What if we escalate above what the home will appraise for?
Answer: This is a very real risk in escalation situations. The Live Frederick Sell Frederick team will do a thorough market analysis for you before you make an offer on any property. This analysis will outline the market value and give you, the buyer, a sense of what the home will appraise for. We will discuss the pros and cons as well as the risk with you before you make such an offer.
If a seller thinks there is appraisal risk with the escalation price, it may behoove the buyer to give the seller peace of mind on what they are willing to do in the event of a low appraisal. A buyer may make up the difference in a low appraisal situation by bringing more cash to the table or they may waive their appraisal contingency all together. Note: if the buyer is in a poor cash position, escalations above perceived appraised value are not generally advisable because you don't want to rely on the seller's willingness to reduce the price to the appraised value.
We don't want to give away all our multiple offer winning strategies in this blog, but feel free to reach out to us with all your questions about escalation clauses!
By the way, Drew just won a four offer situation yesterday utilizing this winning escalation clause!