Investors

I thought I’d share with you a bit of negotiation strategy that just helped my buyers secure the property they wanted with 5 other offers on the table…

Like it or not each REALTOR has their own “bag of tricks” (if you will) when it comes to negotiation tactics.  Now, I don’t really mean *tricks* as in the bad, unethical form of the word but rather negotiation tactics which have been found useful and advantageous to representing the buyer or seller in a transaction.   With the competitive seller’s market that has reared its ugly head in the lower end market lately I have found it useful to pull out the ESCALATION CLAUSE from my bag.  Dictionary.com defines ESCALATION CLAUSE (sometimes called an escalator clause) this way:

a provision in a contract calling for adjustments, usually increases, in charges, wages, or other payments, based on fluctuations in production costs, the cost of living, or other variables.

For our intents and purposes it works slightly differently.  Here’s how I might define it:

a provision in a purchase contract allowing for incremental increases in the offer price, up to a predetermined amount, based on and evidenced by competing offers.

Here’s how it might look:

A house is listed at $250,000.  Mr. & Mrs. Buyer would really like to pay $245,000 for it but they are willing to pay up to $260,000 for it.  They offer $245,000 and use an ESCALATION CLAUSE that says something like this, “In the event of a competing offer the buyers will pay $1000 over the highest offer’s net up to a purchase price of $260,000.  In the event of an escalation, seller to provide proof of competing purchase contract with LSR (that’s our pre-approval form here in AZ) or Proof of Funds. Seller represents and warrants that competing offers are true and valid offers.”

Without an ESCALATION CLAUSE Mr. & Mrs. Buyer do one of two things: they automatically increase their price to the highest they are willing to pay for the property OR they offer less than they might actually pay and gamble on what the other buyers are offering.

With an ESCALATION CLAUSE Mr. & Mrs. Buyer are able to offer what they might really want to pay for the house.  Then they use the ESCALATION CLAUSE to offer $1,000 (or $2,000 or whatever) over the highest competing offer up to their maximum.

There are a couple of things to keep in mind when using ESCALATION CLAUSES:

1. Is there any way to really tell if the listing agent or seller is being truthful?  No, probably not.  There are liars and scumbags that exist everywhere.  Plain and simple, we do the best with what we can so make sure you are comfortable with the top price that you offer.  You may be escalated.
2. In my experience banks won’t deal with them.
3. Unless you remove it the appraisal contingency still exists so the property must appraise for the final price.

There you have it!  ESCALATION CLAUSES…the little gem that helped my buyers get the house they wanted and saved them $4,000 in the process.  I’d love to hear your thoughts and experiences regarding them.

Photo Credit: Stig Nygaard, Creative Commons

{ 4 comments }