Escalation clauses can be OK, but inspection a must
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.
If the market’s hot, a buyer may use an escalation clause in a home offer, but should get proof of a competing bid.