A first time buyer, Kate, contacted us ready to buy her first home. She was familiar with the market and sensed there was a good chance she would be competing with other buyers for the same house.
She asked, “how does the seller determine the winning offer?”
In a market where the inventory is low and multiple offers are common, the Buyer Agent will generally suggest the buyer include an “Escalation Clause” with their offer.
An “Escalation Clause” is a Realtor approved document that creates the framework on how to calculate the highest offer. It has two parts, an “incremental amount” and a “cap”.
The incremental amount is the amount that the buyer agrees to beat any other offer by. For example, a buyer might offer “to beat any other offer by $10,000”. In this case, the incremental amount is $10,000.
Each buyer also needs to establish a cap. This is the amount that the buyer is not willing to go beyond. For example, if the buyer is unwilling to pay more than $900,000, this would be their cap.
Therefore, the Escalation Clause included in the offer would state “…the buyer will beat any other offer by $10,000 up to a cap of $900,000”.
This is what I see all the time. Kate finds a house she loves that has a list price of $800,000. Then we find out there are three other competing offers. Kate, not wanting to lose the house, decides to include an Escalation Clause with her offer. Kate’s offer might read like this.
• Full Price offer of $800,000
• Incremental Amount of $10,000
• Cap of $900,000
In this example, Kate’s offer ends up being the highest offer. Even though Kate offered up to $900,000, she did not have to pay that much. She only had to pay $10,000 above the next highest offer, Mary’s. Mary’s offer capped out at $875,000, so Kate wins at $885,000.
People often ask, “How can prices go up so fast?” The culprit is the Escalation Clause.
