Vivienne’s Negotiation Academy: Escalation Clause

Escalation clause

In a tight housing market like the one in Madison right now, where seemingly every home has 2 or 3 offers on it, various negotiation techniques are employed by agents trying to get the best deal for their clients. One of the newer techniques being tried out is the escalation clause. A buyers agent will place a clause in the offer to purchase that says something to the effect of “in the event of multiple offers on XYZ property, the purchase price is increased to the highest purchase price of the other offer(s) plus $1000, up to a maximum of $275,000.” It is sort of like bidding on an eBay auction. If Buyer 1 wants to offer $250,000 for a house, but is afraid that someone else will offer $260,000 it seems like a smart bet. Except it isn’t, not usually.

As a listing agent, if I receive an offer with an escalation clause – I am suddenly given the golden piece of negotiation information – the other sides top dollar. If I know a buyer will pay $275,000 for the house, do you think I am going to advise my client to take $250,000?

Suddenly this doesn’t look so smart for a buyer. But what about for the seller? They are going to get top dollar for their home right? Well. Maybe. There is a lot more to a Real Estate transaction than the sales price. Once the seller has accepted a buyers offer, what she wants is the transaction to close quickly and smoothly. But imagine how the buyer who is paying top dollar feels when an inspection report comes back with issues (and inspectors ALWAYS find SOMETHING) the buyer who is paying top dollar wants the house to be PERFECT and will nit-pick the house apart, threatening to back out of the transaction if every little detail is not tended to. They have buyers remorse and spend every moment from acceptance to close looking for a way to torpedo the deal. And really – if the next best offer is $260,000 – is upping the ante to $261,000 really worth that risk? Not likely.