Buyer Strategies for a Seller’s Market
An escalation clause states that the buyer is willing to pay $X more than the highest competing offer up to a total of $Y (the ceiling). The offer is contingent upon the seller providing the buyer with a copy of the bonafide competing offer and accompanying pre-qualification lender letter. The contract still includes an offer price (the floor).
The key to an escalation clause is to choose the right numbers for X and Y. For X (the increment) you want to choose a number that not only differentiates your offer, but overcomes any potential shortcomings in your terms. Remember, a purchase contract is a balancing act between price and terms. One side sets the price and the other side sets the terms. For example, if you believe you may be competing against builders or investors for a property who can offer cash, and you are limited to financing, then a bigger X may help you overcome your weaker terms.
Choosing a good Y (the ceiling) can become dizzying if you attempt to guess what the other competing buyers may offer. Instead, you need to review the home market analysis that we provide and choose a ceiling where you would feel equally happy to win or lose the property. You don’t want to lose and say, “I wish I had offered more,” and you don’t want to win and feel that you overpaid.
The escalation clause allows you to bid a range of offers instead of pinning you down to your highest number. We’ve successfully used this strategy a handful of times this year already for our clients and ourselves.