Dear Craig,
I am looking to buy a home in Eagle County and have read about multiple offers and escalation clauses. Realizing it’s a tight market, I’m interested in your input on the best approach for submitting an offer and how the escalation clause process works.
Curious Buyer.
Dear Curious Buyer,
While there are some indicators the market may be stabilizing, multiple offers are still very present. We are seeing unsolicited offers being presented to homeowners in a variety of price ranges and particularly in the under $1M range. Many transactions are still taking place prior to coming to the market. For a while, buyers were making offers on properties even if the home was nowhere near what they needed or wanted. Buyers now appear to be scrutinizing their options/purchases more carefully.
Some sellers are still being aggressive and outpricing the market altogether, which has contributed to some of the stabilization and in some cases, an increase in days on the market. Well-priced properties, including special ones in the higher price points with a desirable location, all have the potential to be involved in multiple offers and include an escalation clause if the offer is to be taken seriously. Lake Creek, Wildwood, and Riverwalk are examples of high-end properties in which escalation clauses were, and still might be, a must for the successful buyer.
Escalation clauses are often used to help a buyer stand out in their initial offer and improve their chances of having their initial offer selected. This value perception can occur in the sub $1M market or on multi-million-dollar properties. If today’s market value is perceived to be less than the list price, most buyers – and Brokers - are savvy enough not to get in a bidding war and the property will sit rather than sell.
There are three factors to consider on whether to include an escalation clause:
- Starting price.
- Increasing offer differential to remain competitive.
- Cap price.
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Past experience and missing out on a previous purchase attempt.
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Top consideration for a first offer – Including an escalation clause conveys a serious offer and hopefully avoids competing for a second time for the highest and best offer against other buyers.
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Asking price – If the initial offer came in above the asking price, there may be some unwillingness to go much higher. In most cases, there is a cap to the price a buyer is willing to and should go.
Working with an experienced Broker who can educate you on how to accurately go into the escalation process is important. A Broker can also be the voice of reason and make sure you stay within your comfort zone, also known as the “ acceptable price for this property for this specific buyer.” If you do not consider all three factors, the escalation clause you use will most likely not be the one that gets the attention of the seller.
Recommended Best Practices
Recommended best practice when submitting an offer is to go in with your best foot forward. This may mean coming in above the asking price, including an escalation clause or other clauses, and limiting other contingencies. If you have continually lost out on offers, waiving inspections or other contingencies might be the difference between winning and losing. Stay within your own comfort zone. If someone is willing to pay tens, or even hundreds of thousands of dollars more than you think a home is worth, let them. Trust the advice of your Broker and trust the advice in your own head. You can dramatically overpay for a home. If a home is the home of all homes and answers all of your needs and wants, then it might be worth it. Just be confident with your decision.
Good luck in your search,
Craig.
