Love them or hate them, escalation clauses in residential purchase offers have become common in this increasingly competitive market. Agents who like them say they can be an important component of the strategy that wins their buyer a house when they’re up against multiple bidders. Agents who don’t like them say they’re poor sportsmanship.
One Boston agent said she’s been encouraging her buyers to use escalation clauses in competitive bidding situations since the early 1990s.
“I haven’t met a seller yet who doesn’t think they’re intriguing,” said Linda O’Koniewski, broker/owner of RE/MAX Boston. “When people don’t like them, it’s usually because they don’t understand them. I feel like we as real estate agents need to understand how to use them on our client’s behalf, whether we’re listing or selling a property.”
Her agents occasionally come up against some resistance from listing agents when they submit offers with escalation clauses, but only in about 25 percent of offers.
Escalation clauses can vary, but a typical clause contains a cap. For example, if a property is listed for $499,000, the offer might say the buyer offers $499,000 for the house, or $5,000 more than the highest offer, up to $525,000. That protects the buyer from having to top an unexpectedly high offer, but O’Koniewski says that’s a mistake.
“We don’t use caps, because when you do, you tip your hand,” she said. “If you make an offer with a cap at X, I think the buyer is basically telling the seller how much they are willing to pay for the house. Most sellers are going to counter with that (cap) number. I know I would.”
Instead, O’Koniewski requests listing agents call her if they get an unexpectedly high offer and give her 30 minutes to see if her buyers can beat it.
To cap or not to cap is not always a black or white choice for Joselin Malkhasian of Lamacchia Realty in Waltham. When the situation warrants, she recommends the clause – and often, but not always, recommends a cap.
“It’s very property- and buyer-specific,” she said. “Some buyers are willing to push the envelope to get the right house in the right location. It’s not a-one size-fits-all. Working with an experienced buyers’ agent who knows how to use them properly is crucial. If they don’t know what they’re doing, they could put a buyer in bad situation.”
O’Koniewski has heard of agents who will not present offers with escalation clauses, or who ask to rewrite offers without an escalation clause, but she said those agents are not doing their best for their sellers.
“Think of it as high-stakes poker,” she said. “Buyers and sellers should work with agents who are astute about all the tactics and use them to their clients’ advantage.”
Escalation clauses often make the difference between whether or not her clients get the home they want, Malkhasian said, especially in the current market.
“I introduce the idea to my buyer when we think there are one or more offers and we think it’s going to go over asking price,” she said. “You put your best foot forward from the beginning. It’s my job to help them put in a competitive offer, but not put them in a situation they’re not comfortable with.”
In Support Of The Traditional Method
Offers containing escalation clauses are certainly legal and Jim Nemetz, senior vice president and manager of Hammond Real Estate in Chestnut Hill and Waban, instructs his agents to present those offers to their sellers if they get them. That said, he doesn’t like them.
“Have you ever been stuck in a long line of traffic at a light on Route 9 and then you see a guy drive up the breakdown lane and cut to the front of the line?” Nemetz said. “Escalation clauses are like that guy.”
He estimates he sees offers with escalation clauses about 10 percent to 15 percent of the time when there are multiple offers on a property, adding that many sellers find them off-putting and that can be a disadvantage to a buyer.
“It sounds like a dream come true, but sometimes it really isn’t … they work sometimes, but we don’t like them,” he said. “The process works best when buyers just come forward with their best offer. With an escalation clause, sometimes sellers feel conflicted about using another offer to leverage a higher offer from other buyers.”
Malkhasian and other agents interviewed for this story said they had run into listing agents who request a rewritten offer without an escalation clause. Though Malkhasian said she’ll push back if she thinks she can, if she gets the sense that pushing back will prejudice a seller against her buyer, she will rewrite it, O’Koniewski said that kind of behavior from a listing agent is unethical; listing agents are supposed to present all offers objectively.
“The challenge we’re running into is that some listing agents say they won’t entertain them,” said Sam Schneiderman, broker/owner of Greater Boston Home Team. “Some listing agents will come back with negativity, and I can understand that. If you have six offers and three of them contain escalation clauses, it’s complicated. But every offer has to be presented.”
Schneiderman said he understands and sympathizes with agents who don’t like escalation clauses, but when he works for a buyer, his job is to help them win the house they want.
“The other side of it is: these buyers are doing their best,” he said. “Often, they’ve bid and lost on three or four homes they loved and now they want to be the first across the line no matter what. Part of the psychology behind it is that the buyer wants to compete – and compete hard.”
