Escalation Clauses: What are They and How Can I Use Them?
Escalation Clauses are a great tool that Realtors have in their tool box to help win in multiple offer situations. You may have never heard of them. Your agent may have never heard of them – if this is the case, you may want to decide whether or not this is the best agent for you. But I digress. Before I get into the nuts and bolts, I need to put a disclaimer on this blog post. I am not an attorney and I didn’t stay at a Holiday Inn last night. I will relay how I have done it and how I have seen it done in my experience. Your area may have different rules, laws, or customs that may make this information obsolete so make sure you know or consult with an experienced professional before writing an escalation clause into an offer.
An escalation clause is a way for a Buyer to tell a Seller that they are willing to pay more than other offers they may have received. This is used in a situation where there are multiple offers on the property – typically in a Seller’s market. I have used it many times and have won the deal for my Buyers. I have also received them many times on my listings and have always been able to get more money for my Sellers. Here are some things to know when using or thinking about using them:
- Some Listing Agents don’t like them.
- Some Sellers don’t like them.
- Some Buyers don’t like them.
- Some Brokers don’t like them.
- Parts of them can teeter on the illegal, if written incorrectly.
Let’s explore. Some Listing agents don’t like them because, depending on how many other offers there are, it can be very confusing, trying to advise a Seller on the details of each offer when there is a huge variable – price. Even more confusing when there is more than one offer that includes an escalation clause.
Some Sellers don’t like them for much the same reason, however, some Sellers don’t feel like it gives all Buyers an even playing field and it makes them feel bad for the other offers. Some won’t entertain the offer simply by matter of principle.
Some Buyers don’t like them because it is, in essence, showing your hand, letting the Seller know what you are willing to pay for their house, reducing the Buyer’s negotiating power.
Some Brokers don’t like them for several reasons, but mostly because agents don’t write them correctly and open themselves, their client, and their brokerage to liability and legal actions.
That brings me to the legality of them. I have seen many that are based on the highest offer the Seller has received and requires a copy of said offer in order to determine the sales price. This is very scary. No one, outside of the two parties, the representing agents, and their brokers should ever see a copy of another offer. If you expect an offer process to be open where all cards are shown from all players, attend an auction.
If you’d like to know best practices and tricks that I use when writing and receiving these offers, contact me and I will be happy to share!
Michelle Froedge is a residential Realtor and Principal Broker in the Greater Nashville and Williamson County areas of Tennessee. “Mom” to four-legged fur baby, Tyler, Auntie to Zelamie, she is a vegetarian and sings in her spare time. Michelle has lived in Nashville and Franklin since 1997 and has been selling homes since 2004.