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To Escalate or Not To Escalate, That Is the Question.

     DC is a uniquely strong market and, in my opinion, serious buyers make a big mistake if they think otherwise.

      Indeed, even in this "bad" market, the problem buyers will have is more likely to be on the opposite end – that when they find something good someone else is going to want it also. As a buyer's agent I hold my breath every time I write a contract on a well priced condo - waiting with hopeful apprehension for the listing agent to tell me another offer has not come in. And - no joke - literally half the time there is another offer, at least one. So how can buyers make their offers the best in the queue?

     I just wrote an offer for a very attractive, almost new Adams Morgan condo with, remarkably, two parking spaces that sat on the market for months at $629,000 until, on a Friday, the agent dropped the price to $550,000. By weekend's end, six other offers had come in. At the end of the bidding war the sales price was $600,000. My buyer ended up on top of the pile.

     So how did she compete? Consider an "escalation clause". I believe (though could be wrong) that escalation clauses actually started in our office, Pardoe Chevy Chase, in the mid-90s – at least at the time nobody else seemed to use them. Don't know who was responsible for the idea but Trip Owen, our experienced and old fashioned manager, touted the idea. We called them our "secret weapon". I confess that at the time they confused sellers as often as they won buyers homes in multiple contract situations. However, over the years they have become common practice.

A bidding war in Adams Morgan

     The clause is only given to the other agent if the prospective buyer is competing with another offer. The clause says the buyer will top any other offer on the table by _______ (the "Escalating Factor", $2000 to $5000 is common) up to _______ (some other contract price, the "Cap"). In other words, if another offer comes in of $560,000 and you say you'll pay $3000 more up to $575,000 then your contract price becomes $563,000.

 

Views of Katharine Graham's mansion

 

     As you can see from the form, if the buyer "wins", the listing agent is obligated to provide the buyer with the offer that has activated their escalation clause so the buyer can verify the actuality of the other offer.

     Realtors are very self-policing and can get seriously censured not to mention fined for lying about another offer. They still might tell you "There's lots of activity. The property is getting lots of showing. Two agents have brought clients back twice and say they're writing offers." These offers may never come in – not because they didn't exist. The prospective buyers could have changed their minds for many reasons from liking another property better, having financing problems (very common in difficult markets), deciding they can't spend quite that much or that they're going to wait to buy for more reasons than one can count. However, a listing agent is playing roulette with her career if she tells you another offer is in her hands when it's not. I personally have never had that experience. Rather listing agents have been very clear that the expected offer HAS NOT come in when I register an offer.

     I must say that in DC and other active close-in markets the buyer's agent is always wise to informally poll the listing agent about what's coming in. And also, in the case of multiple offers, how many have come in and (though the listing agent can do no more than give the buyer's agent some vague sense) how good they are.

     What are pros and cons of using an escalation clause? Biggest pro: It gives you bargaining power if you need it. And, if it works properly, allows you to spend as much as you need and not more.

     I say "if it works properly" because some agents and their sellers do not like escalation clauses. Why? What happens if the contract is escalating above a low second offer? A listing agent may come back to a buyer's agent and ask if they can throw out the escalation clause and negotiate. The only participant obligated by an escalation clause is the buyer. If the seller accepts the buyer's offered escalated price, signs all the documents and produces the other offer over which the price was escalated, the contract is "ratified", i.e. the deal is done. The seller is not obligated to accept the escalated price. They can come back with whatever terms they want, just as in any contract negotiation. My personal opinion is that if the buyer has written an escalation clause and another offer has come in, it is in the buyer's best interest to look at the other offer before they decide whether they'll negotiate further and how much.

     The biggest con is that an escalation clause tips the buyer's hand to the seller. The only way to avoid doing so is to write an offer without an escalation clause – your "best" or something along the way to your best – and take a chance. Ultimately what kind of offer is written is the buyer's choice after being fully informed by the agent. There are many other ways to make an offer desirable. Recently I've had several buyers who chose not to use escalation clauses (and, I might add tried to write low-ish offers) lose the properties to other buyers – perhaps a function of this market. In the past, good "clean" offers, even low ones, have won my buyers new homes. My partner, Richard, says it always comes down to the bottom line. I'm not sure I agree but price is certainly a huge factor.

 

A low second offer ...

and an escalation clause thrown out.

 

     One note re short sales and foreclosures: Generally, in a short sale, the buyer is negotiating with the seller. Once a contract is ratified "subject to third party approval" it goes to the bank that holds the mortgage for approval. Therefore, escalation clauses can most likely be used in short sales. In a foreclosure, the buyer is negotiating with a bank or investor. I haven't come across one that will allow an escalation clause. These institutions ask for the buyer's "best offer". So one writes it and takes a chance.

     So should a buyer use an escalation clause? In general I'd say yes but it's an option that needs to be discussed in the context of each deal.