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What is an Escalation Clause in Real Estate? (with examples) - YouTube
Channel: Kevin Grolig
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- What's an escalation clause?
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(intense music note)
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Hi, I'm Kevin Grolig with Compass.
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I'm a real estate agent
in Bethesda, Maryland,
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and I serve Montgomery County, Maryland,
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and the surrounding DMV area.
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And thank you for visiting my latest video
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in a series, Real Kevin.
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I post videos weekly
about life and real estate
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in Montgomery County, Maryland
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that you're not going to want to miss.
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If you're new to my channel,
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click the subscribe button
and hit that bell icon
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to be notified when I post new videos.
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In today's hyper competitive
real estate market,
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home buyers are being
pushed and prodded more
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than ever before.
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More often home buyers are
competing against five, 10,
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sometimes as many as 20
offers on a property.
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Now I've done other videos about
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how to write winning offers,
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but today I'm going to isolate
one tactic in particular.
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The escalation clause is
a rider to the contract
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that can only be triggered in competition.
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This clause gives elasticity
to a buyer's offer
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to incrementally, help them beat
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and give a higher net
proceeds to the seller
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from competing offers.
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The idea is to raise the offer just enough
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to beat out the competition.
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There are three basic factors
to an escalation clause
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that you need to be aware of.
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Number one, the escalating factor.
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This is the incremental amount
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that you would raise your offer
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to beat out a competing contract.
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The question is how much should
this escalating factor be?
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The escalating factor should be enough
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to get a seller to move their head
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from the other contract to yours.
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Typically, a thousand dollars
in today's price points
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is not enough to do the trick.
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My suggestion is the escalating factor
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should be somewhere between a half
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to maybe even as much
as 2% of the list price.
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That means in the scenario
of a $500,000 home,
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the escalating factor should
be somewhere from a minimum
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of $2,500 up to as much as $10,000.
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I learned a long time ago,
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it's better to work with
percentages than a fixed amount.
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This way the escalating factor
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will either raise or lower some
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depending upon the
price point of the home.
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Number two factor, the cap.
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The cap is the maximum sales price
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that a buyer is willing to pay.
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The question I get asked all the time is
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what price do I need to go up to?
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Man, I absolutely hate that question
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because the fact is, I don't know.
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I always tell my buyers,
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the cap is a number where,
you need to find peace.
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Peace in your head, peace in your heart,
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and peace in your wallet.
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What I mean by peace is if you
win the property at the cap
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of your escalation clause, you
need be happy and at peace.
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And if you don't win because
someone else went up higher,
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you also need to be at peace.
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Peace is something very personal
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that will be different
from person to person
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and from house to house.
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I also like to play a
scenario out with the buyer
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where I will say something like,
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Hey, let's forget about the list price
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of $500,000 for a moment.
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What I'll ask is if the property
was listed for $525,000,
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would you still be interested?
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If no is the answer, we
start moving backwards.
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If yes is the answer we
start moving forward.
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If we move forward, the next question is,
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if the property was listed for $550,000,
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would you still be interested?
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You get the picture.
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So in this scenario, if
$550,000 is the place
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where you still find peace,
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then most likely that's
going to be your cap.
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So if $550,000 is the price
where you still find peace,
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that may be the cap on
your escalation clause.
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Now I may try to nudge up a little bit
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with the old price is right tactic
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of maybe going up as high as 551 or 552.
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- Actual retail price is $900!
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(loud cheering)
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- What I find is those
nice round, even numbers
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is where other buyers end up too.
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Now let's play out a
scenario for just a moment.
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Let's say there's that same $500,000 home
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and five contracts have
been written on it.
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And you write an escalation
clause in the contract that says
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your escalating factor will be $5,000
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up to a maximum sales price of $550,000.
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Now let's just say the
highest competing offer
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that you're up against has
written an offer for $535,000.
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So in this case, with an
escalating factor of $5,000,
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you will beat the $535,000
offer by going up to $540,000.
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So hopefully this all makes sense,
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but if it doesn't, you know
how to get in touch with me.
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The third component of
the escalation clause
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is transparency.
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The escalation clause clearly states
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that if your offer is forced to escalate,
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the seller must provide you
with the sales documents
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from the competing offer
that forced the escalation.
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So basically what I'm saying is,
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we need to see the competing offer.
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I always underline, highlight
and share with the other agent
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that if we're forced to escalate,
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you better show us the goods.
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Lastly, dollars of course
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are always very important
to a home seller,
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but there's other factors involved too.
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One other thing that's
very important to state
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is the seller is under no obligation
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to go with the highest offer.
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Most often, it's the buyer
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who has the strongest
overall contract who wins.
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Beyond price, other
factors that come into play
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are going to be strength of financing,
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contingencies or lack thereof,
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settlement dates as
well as earnest deposit.
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Oh yeah, and sometimes a sappy sob letter
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may do the trick as well.
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That's it for today.
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Hopefully you learned a little
bit about escalation clauses.
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I know, a little scary. What do you think?
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Please comment below,
love to get your thoughts.
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Thanks once again for
checking out the latest video
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in a series, Real Kevin.
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And if you like my video,
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give me a thumbs up or
leave a comment below.
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And if you're new to my channel,
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please subscribe and click
that bell icon to be notified
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when I post new videos.
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If you have any other questions
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about buying or selling real estate
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in Montgomery County,
Maryland, or the entire DMV,
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my contact information will
be at the end of the video.
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That's it for today.
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And as always stay safe, stay healthy,
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stay sane and going peace.
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See you next Wednesday.
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(upbeat music)
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