Should You Write a “Love Letter” to a Home Seller?
Dan S | Apr 26, 2022
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By Stella W on Dec 21, 2021
Imagine it: you find your dream house in Denver. It’s absolutely perfect for your family...and about a dozen other families, too. Let the bidding war begin!
Buyers looking to get an edge in the Denver real estate market often add an escalation clause to their offers, stating how much higher they will go in response to competing bids. Should you?
Learn how an escalation clause in real estate works and if it’s right for your situation.
What is an escalation clause in real estate?
An escalation clause in a real estate contract spells out that you’re willing to raise the offer price in response to a higher, competing offer the seller might receive. The clause sets a specific amount above the competing offer that you would be willing to pay, up to a maximum limit.
Here’s an example of how it works: you find the perfect home and submit an offer of $300,000. With your offer, you submit an escalation clause, setting the maximum limit of $325,000 for your final offer.
The terms of the clause state you will escalate your bid $1,000 over the next highest offer (meaning someone who bids higher than your $300,000 offer), until the maximum escalation limit of $325,000 is reached. So if someone else bids $310,000, your escalation kicks in and transforms your offer into a $311,000 bid, and so on, until you hit $325,000, at which point your escalation stops.
The idea is that by using an escalation clause, you might prevent another buyer from outbidding you in a situation where you'd be willing to pay a little more than your initial offer. The escalation clause lets you "escalate" automatically.
But, don’t jump the gun on submitting one.
According to realtor.com, escalation clauses “should only be used when the buyer is fairly confident that there will be multiple offers, or when the buyer expects to pay an increased price.”
Is an escalation clause a good or bad idea?
Whether an escalation clause is a good idea or bad idea depends on the market.
In Denver, with the combination of low inventory and low interest rates, competition in the real estate market has been more intense than ever. Using an escalation clause might give you an edge; or, it might just be table stakes.
On the other hand, an escalation clause would be a bad idea if you can’t cover the difference between your pre-qualified loan amount and the escalation price.
Going back to your perfect home scenario: if you qualify for a loan of $300,000 — based on your financials and the assessment of the property’s value — and you choose to bid higher than that, you will be responsible for coming up with the escalation difference out-of-pocket.
Also, some sellers choose not to accept offers with an escalation clause because they want you to submit your highest offer up front.
How do you write an escalation clause?
The best thing to do is talk to your real estate agent about whether escalating would help your offer; and if so, under what terms.
According to realtor.com, an escalation clause should focus on the following:
What is the original offer of purchase price?
How much will that price escalate above any other competitive bid?
What is the maximum amount that the purchase price can reach in case of multiple offers?
It’s also a good idea to make sure your escalation clause includes language requiring documentation from the seller proving there was a higher offer. Without it, you might end up paying more for no reason.
Have you considered making a cash offer?
An escalation clause may or may not be the most effective tool for securing your new Denver home, depending on your goals and situation — however, making a cash offer might give you the big advantage you need.
Cash sales are on the rise, according to the National Association of Realtors, whose August 2021 survey showed that cash sales accounted for 23% of existing-home sales.
In a multi-offer situation, it's not necessarily the highest bid that wins. A real estate cash offer can be more attractive to the seller, giving you more leverage to make a competitive offer, winning at a lower price or getting more concessions.
With Accept.inc, you can get Cash Approved™, and gain the power to make real cash offers at no additional cost. Accept.inc offers beat an average of nine offers in multi-offer situations, and data shows that Accept.inc. buyers save on average $13,000 in multi-offer situations, when compared to the highest offer.
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