WHAT’S AN ESCALATOR CLAUSE?

WHAT’S AN ESCALATOR CLAUSE??

It’s not a way to make sure you get the next ride up!              

With a red-hot real estate market, multiple offers, calls for “submit your highest and best offer”, and an influx of Buyers moving to the Triangle from other markets, one tactic some Buyers want to use is called an escalator or more often, an escalation clause.  

But what is it, and how can you use it?     

Here’s how Realtor.com defined an Escalation Clause

At its base, an escalation clause allows you to increase your purchase price so that yours is the accepted offer.   Let’s assume you’re making an offer of $330,000 on a house that’s priced at $329,000. Your escalation clause might read something like this:

“Buyer is willing to pay $2,000 above any bona-fide offer up to $340,000.”   

 Sounds easy enough – you’ve made a solid offer, and to improve your chances of “winning” you add a fairly simple and straightforward escalation clause.  And your escalation clause would include two VERY important things:

  • That the offer be a “bona fide offer” and not something just made up by the Seller and listing agent.
  • That you have a cap on your final acceptable purchase price.

So, what could go wrong?  A LOT!

  1. Since escalation clauses are almost always just about the price, what about the TERMS of your offer and the other offer? If you had a great closing date, loan terms (paying cash, putting down 30%, etc), combination of due diligence fee and earnest money, weren’t asking for any closing costs, etc …. Does that other offer include “equivalent” terms?
  2. Who gets to decide what an equivalent term is?
  3. What happens if you win, but the home only appraises for (in our case above) $330,000?
  4. What if the Seller thinks there’s no way it can appraise for that much?
  5. What if the listing agent themselves had written the other offer?

Here’s the thing – you’re accepting ALL of those pitfalls for one reason – to win the battle by paying a price you’re ALREADY WILLING TO PAY.

And here’s the REAL kicker … in NC, we’re “discouraged” from using escalation clauses, not only because of the pitfalls, but because of some very important legal language in our standard forms – ALL OFFERS ARE CONFIDENTIAL TO THE AGENTS.

Here’s the 2 relevant clauses, and there’s an interesting difference!  From the standard NC Listing Agreement:

“…Firm shall, with Seller’s approval, in response to inquiries from buyers or Cooperating Real Estate Firms, disclose the existence of offers on the Property. Where Seller authorizes disclosure, Firm shall also disclose whether offers were obtained by the individual agent who signs this Agreement, another agent of the firm, or by a Cooperating Real Estate Firm. Seller acknowledges that real estate brokers are prohibited by N.C. Real Estate Commission rule from disclosing the price or other material terms contained in a party’s offer to purchase, sell, lease rent or option real property to a competing party without the express authority of the party making the offer.”

By the way, we don’t have a form to authorize disclosure, so I’m assuming an email exchange would suffice..

And from the standard Buyer’s Agency Agreement:

“12.  CONFIDENTIALITY OF OFFERS. Real estate brokers are prohibited by N.C. Real Estate Commission rule from disclosing the price or other material terms contained in a party’s offer to purchase, sell, lease, rent or option real property to a competing party without the express authority of the party making the offer. However, sellers may elect not to treat the existence, terms, or conditions of any offers Buyer may make as confidential. Additionally, sellers may elect not to disclose or authorize seller’s agent to disclose the existence of any other offer(s).”

So, from the Listing Agreement, we see that your Listing Agent can tell other agents that they have offers already, and we should ethically tell them “one of my clients has submitted an offer” or “an agent from my Firm has written an offer” (since both are Dual Agency).  But we MUST also say “But I cannot tell you anything more about the offers.”  

On the Buyer Agency Agreement, we tell our Buyers – “Hey, all agents are prohibited from telling any other agent what’s in your offer.” – remember asking your agent “Well, what did the other people offer?”   And it’s even possible, though I’ve never run across it, for the Seller to say “Don’t tell anybody we have other offers.”

Here’s where it gets really sideways to me – note in the Buyer Agency Agreement – “Sellers may not elect to treat …any offers Buyer may make as confidential.”

So, neither the Buyer’s Agent nor the Listing Agent can divulge information, but we recognize nothing is stopping the Seller from contacting agents, or even shouting out on social media  what the terms of offers are.  A slippery slope – and probably why we never point this out to Sellers!

But the Listing Agent is not allowed to disclose or show us any other offer that would activate the escalation clause.  We’d just have to take them at their word.   

So, instead of trying an escalation clause, let’s just do this ….

Offer the highest price you’re willing to pay for the home. And then include an appraisal clause, something like…

“Buyer and Seller agree that the purchase price shall be $340,000 unless the property does not appraise for $340,000, in which case purchase price shall be amended to the Lender’s appraised value.” …. You can even include that you’ll pay a certain amount over appraised value (usually 1-2% of purchase price).

But now we’re practicing law – you’re allowed to draft agreements, Realtors are not. We always turn to our favorite awesome attorneys to draw simple legal clauses and documents for us.

As important in this case is to understand what happens when the appraisal comes in below the purchase price?

…but that’s another post for another day!!

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