As we enter the fall real estate season of September and October, when home prices rise from the previous month and the number of both new buyers and new properties increases, it’s a good time to talk about strategies for buyers and sellers in a competitive bidding situation.
Competitive bidding occurs when there is more than one offer on a property, and each offer is accompanied by an Escalation Clause that states the maximum price the buyer is willing to pay over their offer price and by what increments the offer will increase. For example, let’s say the listing price for a home is $500,000 and Buyer A is willing to pay up to $550,000 in increments of $5,000 in order to match and exceed any competitive offers. Let’s say there is another offer of $500,000 from Buyer B, but this buyer only has an escalation cap of $525,000 that they are willing to pay in increments of $5,000 over any competing offers. All other contract specifications being equal in this situation, Buyer A would be invited to change the offer to $530,000 in order to match the next lowest price cap ($525,000) plus one increment of escalation ($5,000), and Buyer A would be awarded the contract. (The listing agent is required to show proof of the other offer.) Of course, the scenarios can get more complicated when there are 10 or 15 offers, each with their own escalation caps and price increments. This is why God invented Excel.
So what’s a good strategy for buyers creating an Escalation Clause?
1. Set your contract offer at the list price.
2. Set your escalation cap higher than you would be willing to pay for the home.
3. Set your escalation increments at 1 percent of your offer price.
The purpose of setting a really high escalation cap is to blow the other competitive bids out of the water. Chances are good that you will not have to increment to that limit—and remember, the Escalation Clause is not a binding clause in the contract; it’s simply an offer to negotiate with the seller. The seller does not actually sign that clause, only the final price adjustment of the winning contract.
What’s a good strategy for sellers in a competitive bidding situation?
1. Set your list price at a fair market value that you would be willing to accept for the property if no competing offers are submitted.
Be careful. I’ve seen the seller’s pricing backfire when they set too low a price, but did not receive any competitive offers. In one particularly bizarre case, my buyer client submitted an Escalation Clause along with a list price offer and the seller came back with a counter-offer of their original price plus 50 percent of the Escalation Clause cap—but there were no competing offers. Needless to say, we declined. So sellers, don’t be greedy.
Armed with these strategies, both buyers and sellers should be able to successfully compete in this fall season of the real estate market. Happy hunting!
Ted Smith is a licensed Realtor with Real Living | at Home specializing in mid-city D.C. Reach him at TedSmithSellsDC@rlathome.com and follow him on Facebook, YouTube or @TedSmithSellsDC. You can also join him on monthly tours of mid-city neighborhood open houses, as well as monthly seminars geared toward first-time homebuyers. Sign up at meetup.com.