The grand slam tool to consider for heavy bidding situations
Dear Home Buyer,
The day has come. You’ve found the home you can’t live without and realize it’s the one for you! What you don’t immediately think about is if someone else is feeling the same about this very home. During the journey of home buying, many folks encounter competitive bidding situations. An escalation clause is a key tool to consider that can help you outbid others without paying way too much (or much more than the second place bidder). Pretty nice balance, right?
Here is a video podcast we made about this!
So, what is an escalation clause?
An escalation is a clause or an addendum that is submitted along with your offer to purchase a home. It works like an automatic price trigger, you may have seen something like this on Ebay if you’ve ever bid.
This allows you to automatically compete against competing offers. You set an incremental amount to go up vs. other offers and a cap to stop at. The other competitive and bonafide buyer offers will be shown to prove the increase in price, well at least their increase in price.
Let’s look at an example:
Below are a set of 3 offers made on a home–
Jack submits an offer of $750k, but with an escalation clause up to $775k by increments of $1,000. Varying terms and conditions.
Sun submits an offer of $780k with no escalation clause. Varying terms and conditions.
Kavita submits an offer of $740k, but with an escalation clause up to $790k by increments of $2,000. Varying terms and conditions.
On price alone, a seller may be inclined to choose Kavita’s offer as her escalation clause would trigger and increase her price to $782k. This would be a winning bid and only a little bit over Sun’s offer who could be in second place. The seller and their agent would have to show Kavita the bona fide offer made by Sun to prove this.
After reviewing the overall terms and prices of all offers, the seller would make a decision. While on paper, once the bona fide offer is revealed to Kavita, if the offer is still valid (not expired) Kavita’s offer could be automatically accepted at the $782k price. But in practice, often the seller’s agent will ask Kavita to update her offer to reflect this price (leaving terms the same) and both parties will then sign. Essentially, it’s more of a two step process, versus one.
When and why is this used?
The escalation clause should only be used in anticipated competitive bid situations. Some signs of one are:
A very busy open house
Redfin labels it as a “hot home”
You suspect at least one other competitive buyer is making an offer
A home’s asking price is artificially low
If there were many offers, you could crush the competition and avoid a lot of the back and forth. This is especially important when there may not be more than one round of offers and you hear “best and final” offers are needed. Remember, a seller at any point can decide to accept an offer so putting your best foot forward and sending a strong signal to the seller often goes further than you may think.
Also remember, a competitive bid situation only takes one other buyer. Not all buyers know to use this tool, it could be what gives you a leg up if used correctly!
When and why is it NOT used?
Using an escalation clause may not always work, here is when:
1) This clause wouldn’t work well if there were no competing offers. In fact, you would be showing all your cards to a seller, including your max price if you were the only offer they had in hand.
2) Sometimes a seller or seller agent doesn’t accept an escalation clause. Either they do not know how to interpret them or they want a clean process and an offer which is clear, with no if then situations. In the past, multiple competing offers with escalation clauses have sometimes muddied the process for sellers and can be overwhelming to understand.
3) Terms matter too, not just price. Ultimately, it's the decision of the seller as to which offer to accept. If terms matter more to the seller than price, an escalation clause won’t help you much.
How often have we used it in 2021 and what do we think about it?
Nuhom utilized the escalation clause on 35% of our winning offers in 2021. This was heavily weighted on single-family homes as that is where much of the competition was and has been. Nuhom believes that it's a perfect tool to utilize in the current seller driven market we are in. It’s been discussed as a powerful bidding tool by many. We have also included the escalation clause as an option to utilize in our make an offer submission process.