Building a Competitive Offer – The Escalation Clause

In this crazy market, you as a buyer need to be prepared to make the strongest offer possible.  In my basket of “tricks”, I have 15 strategies that I suggest when building an offer if you know you are going to be in a competitive situation.  One of the strongest tools we can use is the escalation clause:

Escalation Clause

What the heck is an escalation clause?

An escalation clause allows you to offer more than the listing price, but allows you to not blindly offer an amount that ends up being a lot more than any of the other competing offers and allows you to have time to decide what your top price you are willing to pay for the home.

A real-life example:

Client “K” found a condo he loved and wanted to put an offer in on it.   After I talked to the listing agent, we discovered that there was a lot of interest in the property so we knew we would have to make an offer that would be strong enough to beat out the other buyers, but not make an offer that was outside of what we thought was reasonable to pay.  Along with several other strategies, we used the escalation clause.

The condo was listed at $250,000.  After we did some research on the sales activity in the specific market, buyer “K” came up with a price he was willing to pay for the condo.  When using an escalation clause, it is important to put a lot of thought into your decision about what you max dollar is.  Is it $300,000?   If I told you we lost out to an offer that was $301,000, would you be upset?  Making sure you are able and willing to pay the max amount you escalate to is one of the most important decisions you have to make when making on offer in todays hectic market.

Buyer “K” decided to escalate up to $306,100.  He offered to escalate in increments of $3,100 over any competing offer.   So that means if that the next highest offer was $301,000, that Buyer “K” would have ended up paying $304,100.  We chose the odd increment amount just in case that extra $100 would put us over the edge as a winning bidder.

What this means to you as a buyer:

As tough as it is to stomach, you will likely pay more for any home, townhouse or condo in Seattle than it is listed for.  The escalation clause gives you the power to be competitive, without paying more than you are able or willing to.  Just make sure that whatever max number you choose, you will be happy if you end up getting the home for that price, and you will be relieved if you don’t get the home because you weren’t willing or able to pay any more than your chosen max amount.  As buyer “K” put it, “I want to be competitive, but I won’t compete with crazy.”

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