Escalation clauses can be powerful

[Russell Holmes]

Many seasoned Realtors, especially on these forums, likely already know what I'm going to share and use escalations all the time. I didn't break any new ground or invent anything new. I've simply put things I've learned from BP folks to good use and wanted to share for others who may not have heard the specific podcasts or read the threads I did but who find this post instead. It may help newer investors and/or newer Realtors who may not know these exist.

In my local market the inventory is extremely low and good properties often have multiple offers quickly. I'm surprised by the overall lack of awareness that many Realtors in my market seem to have in the power of an escalation clause used properly. I've seen several mentions by other successful Realtors on these forums of using them and heard them mentioned in podcasts, but when I've presented them locally, I often get met with surprise and sometimes have to explain to list agents what they are. These list agents have often been in the industry much longer than I have been so it must not be as common among strictly retail transaction realtors.

An escalation clause basically states "The offer is for $XXX,XXX but if another verifiable offer nets the seller more, this offer will increase to beat net by $XXXX up to a cap price of $XXX,XXX". Every state and broker is different, so I won't share the legalese that I use since it may not apply. Mine is nearly a full page and covers how to prove the 'other offer', how to go about using the escalation, and covers disclosures of what could happen with multiple escalation offers. It also ends the escalation at the ratification of contract, a later higher offer can't open up the clause again. I found the legal wording to use by asking around within my brokerage, but there's no standard form through the Realtors Association for it so many Realtors don't know to ask their broker or have an attorney draft one. I'd be happy to share the terms I use privately with anyone in FL with the understanding that I'm not an attorney, I didn't write it, and your mileage may vary. But I don't want to post that publicly since I'm not an attorney and it could be legal garbage in another state. The premise of escalation is the point of this post, I'm sure there are many variations on the specific terms.

It's not smart to use an escalation when making an initial offer since the seller could simply counter offer back at the cap amount knowing what the buyer will pay. It's also best practice, in my opinion, to make the 'base' purchase price offer a reasonably high amount that should be acceptable as is, rather than low balling and having a huge range for escalation. The final escalation amount should be a "I don't want to lose it over this amount" not a large range to cover huge swing in price. I often won't even bring it up as an option to a buyer when making the initial offer. However, when a 'highest and best' request is made with a definite deadline for offers, I'll explain how escalations work and why they are helpful rather than blindly throwing more money at a deal when it may not be necessary. I'll then prepare the best offer with escalation and 'schedule send' it to hit the list agent's inbox within an hour of the deadline. List agents shouldn't give a heads up to anyone of escalation, but this way it limits that risk. There's always the risk still that the seller could counter back at the cap, but it's much less likely when a seller is considering multiple offers on the table and has given a deadline, doing so could expire their other offers while waiting on counter response.

I've used an escalation clause several times recently, oftentimes not being necessary when the 'base' number is highest offer anyways and it gets accepted without escalating. However, I have one under contract now that was very satisfying. My client's offer matched another Realtor's offer from my brokerage. Four offers on the table, two with matching numbers on the purchase price line. Without an escalation it could have easily lead to round two of blindly shooting for highest and best. My buyers were already up to their comfortable max, but didn't want to lose the deal over a few thousand, so we put a $3000 escalation with a $500 escalation factor.

I've been licensed two years, on BP for a little longer. I feel I've learned more about creative negotiations here than I would have through only traditional realtor training. The listing agent/owner on this particular property has been licensed 10 years longer than I've been alive and 43 years longer than I've been licensed. They did a beautiful job of rehab and listed it for a fair price. All offers were below list and he was aiming to get them closer. He called me just after the deadline and said

"Well I'll be damned, a young realtor that knows how to use an escalation! Your client has now beat out the three other offers and we'll only need to use $500 of the clause. I can't tell you how many times I've used an escalation in my career and had to explain it to the list agent. I don't even care about $500 net, we'll call it $500 gross increase and it's your deal. Sending the competing offer and pre-qual now".

When I received the other offer and realized they were with the same brokerage, had the same access to escalation legalese as I did, but didn't use one, I realized how important Bigger Pockets has been to my success and growth. When this other Realtor sees the sales data hit the MLS next month, it'll appear that their buyer lost by $500.

While there's a chance that sharing this could result in somebody in my local market going head to head with one of my buyers on an escalation, I think the chances of that are slim compared to the benefit of more BP folks being better prepared to get deals. And as always, best offer always wins....and it's not always price that is top priority.

My hope is that this helps somebody somewhere get a deal for a better price than blindly throwing more money at it!