Why is an escalation a bad idea when making an offer on a home?
In a situation of multiple offers a buyer will sometimes ask their REALTOR® to insert an escalation clause into the offer contract. It works like this. Say you’re wanting to make an offer on a $400,000 home and you find out other buyers are making an offer as well. Since you really want the home and want to beat out the other offers. So, you propose something like this, “I will offer $1,000 above whatever is the highest offer.”
You hope this will win the deal.
There are all kinds of things that can go wrong with the use of an escalation clause. That’s why the Texas Real Estate Commission prohibits real estate agents from writing an escalation clause into the contract. Doing do is considered the practice of law. It’s a violation of TREC rules and regulations. Only a licensed attorney could draft such a clause.
What could go wrong? Well, what can go wrong with an escalation clause is this. What if one of the other buyers offers $10,000 or $20,000 or even $30,000 above market value for the property? You have now locked yourself into a contract that has you paying a grossly inflated price.
There are also reported stories of situations where a Seller has enticed a friend or neighbor to make an offer above market value. This is just to manipulate your offer and take advantage of your escalation clause. This opens up a big can of worms.
In recent years the hot real estate market in Austin, Texas has resulted in many situations of multiple offers. I faced just such a situation this last weekend. My buyer made an offer, but was beat out by other buyers competing for the property. It’s disappointing.
Yet, no one wants to pay too high of a price a home. That just doesn’t make sense.
It pays to work with a knowledgeable REALTOR®, one who is an expert in contracts so that no one takes advantage of you.
