Agent Insight

How does the bidding process work? Escalation Clause!

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Multiple offers on DC properties are more common than you may think. So, how does the "bidding" process work? Escalation Clause!

There are two parts to an Escalation Clause: 1. The “Escalating Factor” or increment over the next best offer, and 2. “Cap” - The maximum the buyer is willing to pay.

For example, let's say you're submitting an offer on a listing priced at $700,000

Let's start with the Escalating Factor (amount over the next best offer). In my experience, a strong escalating factor or increment is anywhere from 1-2% of the sales price, depending on your terms and how many offers you're competing against.

It might seem like a lot but consider this: The Seller’s first offer is financed with a 10% down payment, but the competing offer has a down payment of 20% and better financials. If the Escalating Factor in the first offer is only $1000- $3,000 higher than the 20% down payment offer, the seller is likely to go with the 20% down payment vs. the riskier 10% down payment. If the Escalating Factor is raised to $7,000 (1% increment) over the competing offer, now the Seller really has something to think about.

What about the 20% down payment offer? Not a slam dunk. What if the competing offer is a 40% down payment or all cash? Those larger down payment and cash offers typically do not need to include an appraisal contingency. That 20% down offer should have a strong Escalating Factor to incentivize the Seller. In the rare case when a Buyer's offer is all cash, quick close and no contingencies, a lower increment for this Buyer is recommended.

Next is the Cap (the maximum the buyer is willing to bid). Simply put, the maximum the buyer is willing to pay even if a competing offer, plus your increment, ends up higher than your Cap.

Very important- the Escalation Clause in DC is non-binding. It's a solicitation of a seller counteroffer based on the figures in the escalation clause. The listing agent must provide proof of the offer pushing your offer up. Ultimately, to ratify at the higher price, the Buyer must sign the Seller's counteroffer.

Other terms- Sellers must take into consideration not only the dollar amount but contingencies, close date, and other terms in each offer.

Also noted in the Escalation Clause is how the additional funds are paid. The loan amount remains the same and Buyer pays the increase in cash at closing. The down payment remains the same and any increase is added to the loan amount, or the loan amount automatically increases to xx %.

Now let's take a look at this example and see if you can decide which offer wins and what the final price is. All contingencies and timeframes equal:

List price- $700,000

Offer #1- $700,000.
Escalation- $10,000 increment, $730,000 cap

Offer #2- $690,000
Escalation- $7,000 increment, $748,000 cap

Offer #3- $720,000
No escalation

Which is the winning offer and what is the final sales price?

Of course, there are many other variables here and that’s why It's critical you have an experienced agent on your side throughout the home buying process. We're here to help you in determining when an Escalation Clause will work for you.