Using an Escalation Clause When Purchasing a Home

If you're in the market to buy a home right now, you're probably finding out that it's not easy. According to the National Association of Realtors (NAR) existing home sales are -3.7% month-over-month. This is a direct result of the historically low inventory of homes available for sale as buyers are competing for homes. NAR statistics cite that across the country the average number of offers on an existing home is between two and six. Buyers are placing their best offers to get sellers to choose them. According to Zillow.com the average home value will rise as high as 13.5% by mid-2021 and end up 10.5% higher than their current levels at the end of the year. Buyers are even using escalation clauses with their offers to purchase a home.

Escalation Clause Advantage

An escalation clause is an addendum to a real estate contract that some buyers are using in this sizzling seller's market. An escalation clause states that a buyer will pay a certain amount higher on a purchase price than all other offers on the home. This clause also has a capped price. For example, if a house is listed for $300,000, Buyer A may use an escalation clause to pay $3,000 more than any other offer with a $320,000 cap. Let's say another buyer, Buyer B, puts in an offer of $310,000 on the same home without an escalation clause. Buyer A would end up paying $313,000 if his offer is chosen. Buyers have to be careful when using escalation clauses. The homes they buy must appraise if they are obtaining a home loan. Some sellers are even asking buyers to waive appraisals.

Other Tricks Buyers Are Using

Some buyers are waiving appraisals so that sellers will choose their offer. If buyers do this, they must make sure they have enough money to cover the difference in price if the home doesn't appraise. Buyers are being flexible with closing dates, letting sellers choose the dates that work best for them. Buyers are being careful not to ask for any personal property that isn't included with the home sales. Buyers are also putting down more earnest money than they have in the past to show how serious they are.

Financially Strong

Sellers are choosing buyers who are the strongest financially and want to see that buyers are able to pay higher down payments. They are looking for buyers who are obtaining the least risky home loans. For example, buyers who are putting down at least 20% with conventional loans are considered strong buyers. Buyers who are able to be approved for conventional loans typically have better credit scores and lower debt-to-income ratios.

We haven't seen a seller's market like this in a long time. Home values are rising at record rates and homes are selling at record speed all while interest rates are still historically low. Buyers should be sure to find real estate brokers who are familiar with escalation clauses and all the other ways to make their offers stand out.

As some fear another recession, rest assured, the economy is not like it was when we experienced the last recession in 2008. Real estate was the cause of that recession. This time, real estate is actually keeping the economy out of another recession. The real estate market is expected to balance out however no one has a crystal ball to tell us when that is expected to happen.