Buyers will sometimes include in their offer a clause in which they agree to pay a sum (typically a thousand dollars or so) “over any other buyer’s offer.” Escalator clauses appeared at the height of the real estate bubble and are now reappearing in the short sale market. Escalator clauses were then, and are again now, a buyer gimmick designed to trick the seller into leaving money on the table. What the buyer with the clause hopes is that they will get the property without having to bid against other informed buyers.
Escalator clauses work only if the competing buyers do not know of the clause. Keeping the existence of an escalator clause a secret from other buyers means risking leaving money on the table because there is no way to know if one of the other buyers might have paid even more for the property than was paid under the escalator. In a short sale situation, leaving money on the table means the seller risking a larger deficiency, tax burden, or credit hit than would otherwise be the case.
As was the case during the earlier bubble, an escalator clause signals a buyer who is trying to purchase at less than their best offer price. Sometimes, escalator clause buyers will actually tell the seller what the buyer’s best offer price really is by placing a limit price on the escalator. A rational seller will always seek each buyer’s best offer. It follows that an offer with an escalator clause should always be rejected and the buyer asked to make their last best offer.
If there are multiple offers pending at the time the offer with the escalator is made, each offer can be rejected and each buyer informed there are multiple offers and they should make their last best offer by such and such a date. The best offer is then accepted and forwarded to the lender. If the escalator comes after another offer has already been accepted and forwarded to the lender, simply reject it and ask for the buyer’s last best offer. If the buyer is just fishing for a fool, they will go away. If not, they will make their best offer. Either way, the situation is resolved without bringing in the complication of an offer with an escalator clause into an already complicated situation.
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