In the spirit of fair play, this isn’t right. But in a market where buyers get tired of losing, you can’t blame them for trying alternatives. Agents should have a standard policy/strategy on how to handle the escalation clause – get good help!
From the Boston Globe:
Katrine and Stephen Campbell were up against stiff competition from 10 other bidders for the Reading home they wanted to buy. So the couple tried an aggressive strategy to give them an edge: Instead of making a specific offer, they promised to top whatever turned out to be the high bid by an additional $5,000.
The increasingly popular tactic, known as an escalation clause, worked. The Campbells bought the four-bedroom house late last year for $597,000 — or $18,000 above the original list price, including the extra $5,000.
“We must have looked at 50 places before making a bid on a house,” said Katrine Campbell. “We made only one offer — and we got it. The escalation clause gave us an edge.”
In a sign of how competitive the Boston-area housing market has become, the maneuver is becoming part of the area’s bidding war landscape, brokers and other real estate executives say. Some report there hasn’t been this much escalation clause activity since the last house-buying frenzy 10 years ago.
There are several kinds of escalation clauses, but all involve an agreement to top the high bid on a home by a set amount of money — often $5,000, and sometimes more.
Potential buyers who offer such arrangements usually insist on a brief amount of time, an hour or less, to follow through or to back out once a top bid has been established.
Skeptics say the clauses are potentially risky and a needless ploy that could backfire by alienating some sellers. It can also lead to disputes about whether buyers or sellers have complied with escalation clause terms, they say.
“It’s a tactic that’s not going to appeal to everyone,” said Peter Ruffini, a regional vice president at Jack Conway Realty in Norwell and president of the Massachusetts Association of Realtors.
“It sounds a little risky to me. It sounds sort of like issuing a blank check to sellers.”
But brokers who use escalation clauses say the tactic is legitimate and works. They say it’s no blank check if the proposal is crafted correctly.
“I use them all the time now,” said Ryan Wilson, a real estate agent at Chestnut Hill’s Wilson Group, affiliated with Keller Williams Realty.
Wilson said about 75 percent of the offers he now crafts with potential buyers include escalation clauses.
“Escalation clauses are not yet that widespread with other agents, but they’re gaining popularity,” Wilson said.
When Sara Barbuto and Kate Marciniec were looking for a home, they engaged the same broker who represented the Campbells: Ramsay Fretz in the Boston office of RE/MAX Leading Edge, a firm considered aggressive in its use of escalation clauses.
But the house hunters employed a slightly different strategy once they set their sights on a three-bedroom home in Melrose, which was listed for $449,000.
Barbuto and Marciniec thought the asking price was too high because the home needed repairs.
So they bid $25,000 below the list price, the same amount offered by another potential buyer. Then the seller asked the two bidders for their “best and final offer.”
Instead, Barbuto and Marciniec provided a written escalation clause. They promised to beat the other bidder by $5,000, if given an hour to decide whether the price was right. The tactic worked, and they bought the home for $443,000.
“It’s a very interesting negotiating concept,” said Barbuto, who, with Marciniec, had previously bid on seven other homes without using escalation clauses.
Each time they lost out to higher offers.
The use of escalation clauses raises an obvious question: Couldn’t a seller make up a fictitious high-bid figure to command even more money from someone promising to top the best offer? That’s possible but unlikely, brokers say.
Fretz and other real estate agents say they always include a written provision requiring sellers who agree to an escalation clause to produce copies of “bona fide offers” from other bidders and preapproved mortgage documents, with the names of other bidders blacked out.
In practice, the brokers say, they usually don’t ask for documented proof because they know and trust agents representing sellers.
Despite the growing popularity of escalation clauses, some brokers question whether they are really needed very often.
In the event of a bidding war in which buyers offer the same price, sellers can always demand a “best and final offer” from bidders — and that’s it, said Tom Grimshaw of Gibson Sotheby’s International Reality in Boston.
Sellers can then even proceed to a second best-and-final round if there’s another tie, he said.
Brian Montgomery, an agent at Charlesgate Realty Group in Boston, said some sellers are caught off guard and even upset when a bid includes an escalation clause. Some refuse to deal with such bidders.
“The seller figures, why not just give me your highest offer?” Montgomery said. “The tactic can sometimes do more harm than good for a buyer.”
Still, Montgomery said, there are times when he has used escalation clauses over the past year, particularly when a buyer is really intent on purchasing a home.
Ashley Stolba, an associate counsel at the Massachusetts Association of Realtors, said a seller is not legally required to accept an escalation clause offer.
Under Massachusetts law, sellers have wide discretion to reject or accept offers, for any reason, as long as they don’t discriminate against people based on race, religion, sex, or other nonbusiness criteria, she said.
Stolba said she is not aware of any lawsuits so far involving escalation clauses, although she added that she is starting to field more calls from brokers who want to learn more about the tactic.
Or you could just put the house up for public auction then you can decide whether or not you want to pay more than the highest bid. Seems like sellers would benefit more from the auction format in these type of sales. If I were a seller’s agent I’d tell everybody we’re doing an auction as soon as I got an escalation clause offer from one of the buyers.
I agree – and auction is the answer to most gimmicks.
If we adapt some sort of auction format, it should run out half of the realtors. An auction format means we’d be committing to real sales format, instead of the hokey-doke phony glitz and glamour BS.
There is already too few sales for too many agents, and something needs to give.
Isn’t the problem with a public auction the fact that, in general, real estate isn’t a transaction that wants transparency?
In a normal real estate transaction there are only a few buyers, if not only one. That is, the price is being haggled over. Seller wants higher price, buyer wants lower price, realtor doesn’t want the fair price (sorry Jim for the dig; I mean, realtor wants higher price) [city wants higher price, state wants higher price, rest of neighborhood wants higher price; but they have no real influence on any one sale event]. So if there are two buyers, the realtor calls each one and says, “you have been outbid” but usually doesn’t indicate actual prices. Thus the other buyer has to up his or her price by some number on their own in an attempt to scare off the other buyer. So in effect the price bounces up. With these incentives, it doesn’t behoove the seller to be transparent in any sense.
In a true auction, the price movements are completely transparent. And usually in a relatively smooth manner. In most auctions, the auctioneer is rambling on in an attempt to cut off thinking and to encourage speedy action. It just seems to me that without an auctioneer, the final sale price will not escalate as high as the current system achieves and I would think the final price is more sane and more accurate. In other words, the seller, the realtor, the city, the state, etc. don’t want it that way.
That all said, I agree with Jim that some kind of auction format would be the fairest and most sane solution. It would seem to me, that an auction for houses where there are more than one buyer requires a new kind of auction than the current formats. It would seem to me that such an auction design would be patentable (much like Amazon’s one-click was patented) given its uniqueness.