Barry Kunselman | 303.887.0588 | Contact Barry
In an extremely competitive seller's market like Denver, there are more buyers than listed properties and multiple bids are common. One of the strategies used by buyers' agents to win bidding wars is to include an escalation clause. This clause states that if a competing offer is made on the property, your offer will automatically leapfrog other offers by a certain amount, with or without a cap. Adding this type of clause can help ensure that you don’t get outbid by another home buyer.
When do you use an escalation clause?
Escalation clauses and offers are communicated between the buyer’s REALTOR® and the seller’s agent. The buyer's agent can use an escalation clause either in the original purchase agreement or in a counteroffer. An escalation clause is triggered when the seller has proof of a bona fide offer from another buyer. This means that the offer is legitimate and enforceable.
ESCALATION CLAUSE WITH CAP
The buyer typically identifies a specific amount above a competing offer that the buyer is willing to go, up to a stated maximum.
Pro tip #1—escalate by an unusual number. Most offers will escalate using nice round numbers. To stand out, use uneven numbers that are a few hundred or a few thousand more than what you would commonly think to escalate by. If other buyers are escalating by $10k, and you increase by $11k, you win. These speeds up the process of a bidding war and the seller knows exactly how high the buyer can go.
Pro tip #2 - If you are only escalating $500, or $1,000 each time, it may not be enough to move the meter for the seller if another offer has a better close date or not as many contingencies. So, take into consideration the price point you are at and adjust your interval accordingly.
As a buyer, you don’t want to pay more than you need to for a home. Using an escalation clause with cap can give you more confidence when buying a home and ensure you stick within the budget you set in advance.
ESCALATION CLAUSE WITHOUT CAP
Buyer willing to pay "X" amount above the highest price with proof of the highest offer. An escalation clause without cap can give you the best chance of winning multiple offers, but it also has some drawbacks.
Escalation clauses can cause issues with appraisals if their offer exceeds the home’s appraisal value. Lenders are very particular about how much they will lend for a home. Lenders require an appraisal to determine the home's market value and won't lend above this amount. Therefore, an escalation clause can lead to a situation in which the price offered goes too high and exceeds the home price it was appraised at. A buyer may win the bidding war to discover later the lender won't give them enough funds to pay for the home.
Feel free to watch the full message above, or use these timestamps that will direct you to various points in the video:
00:00 - Introduction
00:09 - I have this beautiful home that hit the market this weekend and we did extremely well
00:27 - Winning offer used an amazing strategy, escalation clause with an unlimited cap
01:00 - Wrapping it up
I hope this escalation clause video helps you as a first-time home buyer when making an offer in the hot 2022 Denver housing market.
If you’re thinking of buying, act now before mortgage rates and home prices increase further. If you’re thinking of selling, your best bet may be to sell soon so you can beat the increase in competition that’s about to come to the market. Please reach out on 303.887.0588 or email email@example.com. Barry Kunselman, Denver Metro Realtor.