REALTOR’s Negotiation Tactics: The Escalation Clause

by Shar Rundio

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

 

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Top 10 real estate post of the day for 1/5/2009 : Tempe real estate and free home search
01.05.10 at 8:52 am

{ 15 comments… read them below or add one }

Dean Ouellette 01.04.10 at 9:41 pm

OK I had to count my deals in 2009, of my deals, 15 (a little more than half) were actually acquired using the escalator clause, so I am a big believer in it. Glad to see you using it, you have some great language you use too and your clients should be thrilled to be using someone so obviously a professional as yourself.

One of my favorites is when agents say “the bank wont take an escalator.” First it is the right of the agent to reject an escalator clause, but be honest about it. Our team works with 26 banks for REOs, not one of them does not allow escalator clauses, they just tell us to submit offers, so if you as an agent were to submit one we just enter that as the high bid. But some agents say “banks do not accept” they are jsut saying they dont want to accept them.

One thing I tell my buyers when they want to use it is the escalator should be 1% of price. Because as a listing agent if someone came in on a 300k property with a “$500 more” I would think that is weak. So for that reason I tell my clients to use it, and use it often, but at 1% out of respect for everyone in the process.

Another great post Shar. Look forward to your postings.
.-= Dean Ouellette´s last blog ..Tempe AZ real estate market for 85284 in 2009 =-.

Shar Rundio 01.04.10 at 10:48 pm

Hey, Dean! Thanks for sharing your experience and expertise. I like the 1% rule of thumb. I’ve usually started with $1000 and then based on the purchase price encouraged the buyer to adjust it but that is a better way to make recommendations.

Thanks for the input on the banks, too. It would seem though (if I’m understanding you correctly) that they don’t really allow the escalation to be used as intended, correct? The offer is just automatically escalated?

Dean Ouellette 01.04.10 at 11:26 pm

No, sorry for miscommunication. Lets say there are 5 offers, the highest is 125k and you have 1k above up to 130k, then when we put your offer in we put it in to the bank at 126k, that is what i mean.
.-= Dean Ouellette´s last blog ..Tempe AZ real estate market for 85284 in 2009 =-.

Denise 03.20.11 at 3:01 pm

And what happen if I have 3 offers and the 3 of them have escalation addendums….one escalation goes over the other and until you get the highest escalation offer?

jim 06.12.11 at 6:20 pm

It is not legal to show the buy side realtor anouther offer just because they use this escalation clause

Tina 11.01.11 at 3:18 pm

Yes it is legal to show other offers. It’s not an actual purchase contract unless it is signed and executed by all parties. If it was declined, it can certainly be shown to another buyer.

liquid filling services 11.10.11 at 5:20 pm

I was very pleased to find this website. I wanted to thank you for your time for this wonderful post!! I definitely enjoy reading it and I have you bookmarked to check out new stuff you blog post.

Jason 02.05.12 at 2:14 pm

I use it routinely and have always been successful with it (about 50% are actually escalated).

Michele Guss 02.22.12 at 10:18 am

I found myself having to write an offer using an esclation clause today. Francy pointed me to your post. Thanks so much! Fingers crossed my buyer’s get the home!

Rich 03.14.12 at 12:55 pm

Although I do see the potential merit to include an escalation clause, I have to wonder what is to stop the seller simply returning a counter-proposal removing the clause and countering the price to the predetermined ceiling price indicated in the original clause? (since its been disclosed that the buyer is automatically willing to pay and can afford more for the property.)

Paul Kelleher 04.04.12 at 7:38 pm

Had a client use it today in the State of MI. The listing agent reused to present the offer? Siad he would not touch it with a 10 foot pole

Shar Rundio 04.24.12 at 7:45 am

Paul, hmmmm…that’s too bad. Sorry to hear that it didn’t work for you. Some agents (obviously) don’t understand it and are scared of that which they don’t understand. Don’t give up on it though! Someday your buyer will thank you for it!

Larry Brewer 12.30.12 at 8:28 am

This is fairly common here among the more experienced agents, and in some cases it shows up more than once for the same property. Then you find out what people are really prepared to offer. It will keep you in the game most of the time.

Tracy King 03.05.13 at 6:16 pm

We have a very fast accelerating market here with very low inventory and a lot of buyer demand. I’m beginning to see escalation clauses used here and because I usually represent Sellers, I have seen several different responses from them. Some like them, but most find them annoying. We have countered people back at their top price and they have weaseled away from that. (Does my language imply my attitude? Hm.) Someone raised a point about what constitutes a verifiable competing offer and that concerns me. Is it possible that a buyer would decide that the competing offer isn’t “real” enough and use it for a reason to reduce the price later in the transaction? It seems to me that the cleanest way to accept a buyer who has made an offer with an escalation clause is to send one last counter offer after all is agreed that the sales price is x with no mention of any escalation or competing offers.

Kr 06.24.13 at 6:49 am

I think escalation clauses are a great idea. I tried one about 7 years ago – unfortunately did not work, as the highest it would go was still lower than another bid. Does anyone have some sample language on this – I’m trying to do another one, and would like to improve they way I wrote it before.

thanks..

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