Bidding Wars| Escalation Clause | How are you going to win this one?

Cori Dunphy
Published on February 27, 2022

Bidding Wars| Escalation Clause | How are you going to win this one?

Bidding wars here in Monmouth County NJ? Are you experiencing the madness in this real estate market?

If you are trying to buy a home in New Jersey and are losing out on offer after offer, this video is for you.

Hi, It’s Cori with RE/MAX CENTRAL and CoriSellsNJ.  Bidding wars are kicking all of our asses, so today I’m here to give you a quick 5 minutes run down on a method you can try to implement so you can be the lucky winner of a home that has multiple offers.  I’m going to try and go over this rather quickly so for more detailed information please read the blog post that I have linked below in the description box!

So what is this little bit of magic that just may help you be the lucky winner in a real estate bidding war?  DRUM ROLL PLEASE.  

It’s an escalation clause.  But what the heck is that and how does it work plus a few pros and cons! Let’s talk about it.  

What Is An Escalation Clause In Real Estate?

An escalation clause is an addendum to a sales contract that states the purchaser will increase their offer by a certain dollar amount over the next highest bidder, but not higher than what’s known as the escalation cap.

Say What??????? So what does this really mean?  It means you are able to offer an initial price on your initial offer but you insert a clause in the contract that allows your offer to grow as other offers come in.  HUH????????

So in simple terms, you are making an offer that escalates as other offers are submitted.

You also may want to hold off adding an escalation clause until you get a counteroffer.  Otherwise, you are pretty much throwing out your highest and best offer right away.  It just may make sense to you this method in your counteroffer.  BUT, in a market as insane as what we are seeing here in Monmouth County, many are choosing to use this clause upfront.  

Let’s say you are making an offer on a house for $620,000 and you have decided to include an escalation clause in increments of $1,000 up to $645,000.  What does that mean?

Let’s break it down.  You are offering $620,000 but if someone else comes in and offers $630,000 your offer automatically gets bumped up by $1,000 to $631,000.  Remember you have set a max price at $645,000 so that means you will never bid over your max price at $645,000.  So if someone offers $630,000 you beat them but offering $631,000 but if someone offers $645,000 you will no longer be bidding, you have reached your maximum offer.  

Crazy right?  Sellers are not usually a fan of this process.  If you are offering a certain number as your cap, why not just offer that as your initial offer?  But buyers, well some of them love this concept because they feel like they don’t have to spend more than they have to.  

But, keep in mind, escalation clauses are not foolproof and may not make sense for your unique situation.

Pros

Some of the advantages of using an escalation clause in a contract can include:

  • Buyers can have better peace of mind about their offer. It ensures your budget
  • Escalation clauses make the buyer’s offer look more attractive and serious to sellers and shows the buyer is serious.
  • The buyer doesn’t overpay for a home. An escalation clause can protect you from paying more than is necessary to get your offer accepted. How?   Because your offer only increases when another buyer makes a higher offer.

Cons

As with anything when there are advantages, there are also disadvantages. 

  • Buyers and sellers lose their chances of entering into negotiation once an escalation clause is accepted. Since a clause reveals the maximum amount a buyer is willing to pay, the seller will know their highest offer right away. This eliminates the opportunity to negotiate. The “cap” may remove the bargaining power for the buyer. Instead, a seller could reject the escalation clause and ask for the highest offer.
  • Sellers who accept escalation clauses can no longer issue counter offers to other buyers. Because buyers might not be putting in their highest offer with an escalation clause, sellers may reject it right away.
  • Escalation clauses can cause issues with appraisals if their offer exceeds the home’s appraisal value.  But we are seeing this as a common problem in today’s market with our without an escalation clause

 

Common Mistakes — Escalation Clause Real Estate 

Mistake #1

Too small of escalation intervals. 

If you are only escalating $500, or $1,000 each time, it may not be enough to move the meter for the seller if another offer has a better close date or not as many contingencies. So take into consideration the price point you are at and adjust your interval accordingly. 

Mistake #2

Including the Escalation Clause without Knowledge of a Competing Contract

The listing agent will just counter your offer at your max escalation or somewhere in the middle of your escalation. Officially, you need proof that there is another offer to utilize the escalation, but they could just cross out your escalation clause thereby voiding it, and counter back at a price they know you are willing to pay.

BONUS  -Escalation Clause Tip

Use Unique Intervals. 

Escalate by $1,250 instead of $1,000 or $1,850 instead of $1,000. Make your cap escalation $12,750 instead of $10,000. Everybody likes nice round numbers. Well, I can tell you this many sellers like numbers that are larger. Most offers will escalate using nice round numbers To stand out, use uneven numbers that are a few hundred or a few thousand more than what you would commonly think to escalate by.

 

 

The Bottom Line 

If you’re even thinking about using an escalation clause, consult with a REALTOR® and a real estate attorney who can help you understand the ins and outs of this added clause. Thanks for sticking around this week, I’ll see you on the next one. 

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Cori Dunphy is local, she’s a life-long resident of Monmouth County. Why is that important?  Because she has knowledge of the area. Cori Covers all of Monmouth County but has a very strong following with listing and selling homes in also has experience listing and selling houses in Marlboro, Morganville, Manalapan, Freehold, Hazlet, Holmdel, Matawan, Aberdeen, and more. She has a true understanding of the market in Monmouth County.  

Cori Dunphy is a Marlboro Township resident.  If you need extensive information about Marlboro Township, Everything from Real Estate, to Restaurants, From Schools to Shopping.  JUST ASK!

Cori Dunphy is Realtor®. When you are a realtor.  You are forced to follow an extreme code of ethics and Cori stands by that.  Her client’s needs have and will always come first.

Cori Dunphy is a Certified Pricing Strategy Advisor. This means she can help you determine the most competitive and realistic sales price when listing your home. Relying on your tax assessment or an online estimate just isn’t accurate. A Pricing Strategy Advisor knows how to determine the market value, AND how to help you determine a price that will make your home competitive with other houses for sale.

Cori Dunphy is a Certified Real Estate Negotiator.  This means after you receive an offer on your house, she will use proven negotiating strategies to get you under contract and sold.

Cori Dunphy is a Senior Real Estate Specialist. This means she has the training and experience to meet the needs of the over-55 homeowners who are typically considering retiring and/or downsizing, and whose needs are different than those homeowners under age 55.  Cori currently specializes in the Adult Community of Greenbriar.  www.greenbriarmarlboro.com

Cori Dunphy is a certified e-Pro. This means she uses extensive creative online marketing to get homes sold. Why? Because the majority of buyers find the house they end up buying online! Your house, like most houses for sale, will be found on the thousands of real estate websites showing homes for sale. Cori will extensively market your home on a wide variety of social media platforms. Cori will ensure your house has its own dedicated property webpage, and will also ensure your house is a “featured property”. Ask Cori about the one unique marketing concept she uses that NO ONE else in the area is doing!

Cori Dunphy has proven experience working with home sellers.  Every house Cori has ever listed has SOLD!

Cori Dunphy knows the real estate market.  She knows the average days on the market of homes for sale. She knows the sales price trends. She knows whether it’s a buyer or a seller’s market, and can provide the advice to get homes sold!

Do you have a house to sell outside Cori’s area? Cori will connect you with a Realtor® in her network.  Currently, her network includes New York, Pennsylvania, Texas, California, Tennessee, Georgia, North Carolina, South Carolina, Arizona, Las Vegas, Maryland, Rhode Island, and Kentucky.  This network is growing every day!

Curious about the Marlboro NJ market? Hop over to my website and take a look around. www.corisellsnj.com

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