In a time when we have a busy market with low inventory, everything seems frantic. Once a buyer finds their dream home, it’s human nature to want it at all costs. Buyers are then asking their real estate agent, what can we do to stand out? How can we present the strongest offer? And how can we show the seller that we’ll beat all other offers they may have in hand? In some states, buyers can present what is called an escalation clause with their offer.
An escalation clause is simply a provision that expresses your willingness to pay a specific amount more than the highest other competing buyer when you find yourself in a multiple offer situation. Escalation clauses solely focus on price. It is language written into the offer to purchase and contract that automatically increases your purchase price by a certain amount above competing offers, until the offer reaches the maximum price you are willing to pay for the home.
In North Carolina, the North Carolina Real Estate Commission discourages the use of escalation clauses but does not prohibit them. Commission Rule A.0115 reads, “A broker shall not disclose the price or other material terms contained in a party’s offer to purchase, sell, lease or rent, or to option real property to a competing party without the express authority of the offering party.” What that means is that unless in the unlikely event all competing offers provide express consent to the listing agent that their price and terms can be shared with all other prospective buyers, that listing agent must keep the information private.
There are a number of reasons real estate brokers, as well as attorneys, will discourage the usage of escalation clauses. Some of those being:
1. By submitting an escalation clause with a maximum price, the seller will immediately know the buyer’s top price thereby compromising the buyer’s bargaining position.
2. If multiple offers include escalation clauses, a bidding war may follow.
3. A real estate broker who discloses price/terms of an offer without buyer’s consent gives one party an unfair advantage and risks disciplinary action by the North Carolina Real Estate Commission.
4. The seller may fabricate a fictitious offer in order to drive up the sales price for a buyer who submits an escalation clause.
It is very unlikely that all competing buyers will authorize the listing agent to share the terms of their offers, and why should they? Due to this, most listing agents, with the authority from their seller, do not accept offers that include escalation clauses. What you will tend to see instead of allowing escalation clauses in multiple offer situations, is the listing agent will give a deadline on offers and ask all buyers to submit their “highest and best.” The buyer agent has the ability to call the listing agent and ask them what is most important to the seller? Because sometimes price is not what will win out. Some sellers are looking for a quick or delayed close. Some may be more interested in a bigger due diligence deposit. Not all sellers will gravitate towards the highest purchase price, as sometimes the highest purchase price puts you in a position that the home may not appraise, which could cause the buyer to back out later and it never close.
Real estate transactions are complex, even without escalation clauses. Real estate brokers who choose to work with buyers who want to use one should proceed with extreme caution. Escalation clauses introduce additional confusion, anxiety, and potential fraud. I’ll be clear, I do not advise anyone to use an escalation clause because of our restrictions in North Carolina. No one transaction is worth your license as a real estate broker. You have many options to make your offer stand out, and if your “highest and best” doesn’t win you the house, it just may not have been the house for you. And with that information you can REST EASY.