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Real Living Now Real Estate

Multiple offers and escalation clauses

As the market has become frenzied in some price ranges with multiple offers, the seldom used escalation clause is surfacing again.  Beware of the escalation clause!

Consider the following:  A seller has a home listed for $300,000.  He receives an offer for $320,000 from Buyer Number 1, $20,000 over list.  He receives another offer for $290,000 with an escalation clause to pay $3,000 more than any offer the Seller receives to a maximum of $340,000.  The Seller only receives the two offers.  The firm offer at $320,000 and the $290,000 offer that escalates to $323,000.

The first Buyer was committed to pay $320,000, no matter what anyone else did regarding this property.  The second buyer committed to $290,000 and could have potentially escalated to $340,000, but only if other Buyers came in with offers.  With the Buyer’s escalation clause, the seller could net $3,000 more than Buyer Number 1’s offer.  The sale price is only the start of the closing process.

Which one of these Buyers was totally committed to their ultimate purchase price? Buyer Number 1 was committed to $320,000 out of the gate.  Buyer 2, was committed at $290,000 but had to be pushed by another Buyer to get to $323,000 or possibly $340,000.  Who is more likely to have Buyer’s remorse?  Who will hold out for everything in the Building Inspection?  Who really is committed to their price?  Time and time again escalation clause yielding Buyers are prone to deadly cases of Buyer’s Remorse which potentially halts the ultimate sale.