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Wednesday, February 20, 2013

This Seller’s Market Inspires Greater Use of Escalation Clauses in Contracts

[Published Feb. 21, 2013, in the Denver Post and in five Jefferson County weekly newspapers]

I have utilized escalation clauses for years when representing buyers in multiple-offer situations.  For the most part, my colleagues competing for the same listings were unaware of this tool, but this week I’m going to share this increasingly utilized tool with them and you, while educating my readers about how escalation clauses work.

An escalation clause (inserted under “additional provisions”) says that, in the event there’s a higher priced offer from another buyer, this buyer will pay “x” dollars more than said offer, up to a limit of “x” dollars.  Sometimes, no limit is given.

You know you’re competing with other buyers when the listing agent tells you (or your agent) to submit your “highest and best” offer.

An escalation clause can help you get that coveted listing, although it typically is not accepted in the case of foreclosures. I’ve used an escalation clause successfully in less competitive situations, but it’s getting trickier now that more offers are being submitted and more agents are using the same clause. 

There are a few things to keep in mind when using this tool.  First and foremost, the seller doesn't have to play along.  He/she can choose to counter any of the other offers and, if he/she counters your offer, the seller can ignore your demand to provide evidence of the competing offer you are besting.  So there!
 
I never include a cap, because that reveals how high my buyer is willing to bid. If the buyer worries that the counter will be too high, I remind him that he doesn’t have to accept the counter, and even if he did, he could terminate under the inspection objection (or other) provision of the contract.

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