Es­ca­la­tion clauses can be OK, but in­spec­tion a must

Baltimore Sun Sunday - - REAL ESTATE -

A: Maybe for the first, and ab­so­lutely no for the sec­ond.

Let’s look at the in­spec­tion con­tin­gency. Un­less you are a pro­fes­sional engineer or ar­chi­tect, what do you know about houses? Is the elec­tric­ity up to code? Are the joists that seem to be hold­ing up the base­ment ceil­ing ad­e­quate? You are in­vest­ing in what may be the big­gest pur­chase of your life; don’t take a chance. If a seller is not will­ing to let you have 10 to 12 days af­ter sign­ing the sales con­tract to have a pro­fes­sional in­spec­tor go over ev­ery de­tail in the prop­erty, my ad­vice is to look else­where.

I worked with clients who wanted an ex­pen­sive house, but the seller was not will­ing to al­low a brief in­spec­tion pe­riod. Against my strong ad­vice, they bought the house with­out the in­spec­tion. Four months later, they called to tell me they should have lis­tened — they had se­ri­ous roof dam­age that cost them al­most $100,000 to cor­rect.

What about the es­ca­la­tion clause? Let’s look at this ex­am­ple. In my ex­pe­ri­ence, in most parts of the coun­try, the po­ten­tial buyer makes an of­fer, and the seller has three op­tions: ac­cept, re­ject or counter. You put in an of­fer of $450,000. The seller gets an­other of­fer with sim­i­lar terms but a price of $452,000. Sorry, you lose.

How do you try to pro­tect your­self? You in­clude in the of­fer a state­ment that you will pay $1,000 more than the high­est of­fer, sub­ject how­ever to a cap of $456,000.

In that case, when the other of­fer comes in at $452,000, your es­ca­la­tion clause bumps the price up to $453,000 and you will win. But be sure to in­clude im­por­tant pro­vi­sions: You want proof that there is a real, higher-priced of­fer against which you’re com­pet­ing. I had a case where an un­scrupu­lous agent in­di­cated — falsely — that there was a higher of­fer, and my client, with­out see­ing any ev­i­dence, in­creased the of­fer by $5,000. You should re­view a copy of the other of­fer; the buyer’s name and per­sonal data can be re­moved.

In­ci­den­tally, the agent in­volved in my case paid my client $5,000 plus le­gal fees. So when you are about to sign a con­tract, try to in­sert the fol­low­ing lan­guage: “The pre­vail­ing party in any lit­i­ga­tion or ar­bi­tra­tion shall be awarded rea­son­able at­tor­ney fees and court costs.”

If you sub­mit the es­ca­la­tion clause and your of­fer in­creases, there are three ways to deal with the loan. Typ­i­cally, your of­fer lists your loan as a per­cent­age of the price. So you can pay the dif­fer­ence in cash, and there is no need to change the terms in the con­tract. Al­ter­na­tively, you can change the loan amount in the con­tract. Or you can par­tially in­crease the loan amount and pay the dif­fer­ence in cash.

Bot­tom line: I am not a fan of es­ca­la­tion clauses, but if this is re­ally your dream house, make sure you in­clude the nec­es­sary pro­tec­tions dis­cussed above. Most agents should have a tem­plate of an es­ca­la­tion clause that in­cludes these safe­guards.

AN­DER­SEN ROSS/GETTY

If the mar­ket’s hot, a buyer may use an es­ca­la­tion clause in a home of­fer, but should get proof of a com­pet­ing bid.

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