July 27, 2021

Escalation strategy can win bidding wars.

If you find yourself facing a bidding war in today’s competitive home market, submitting a “lowball” offer might not be a very effective negotiating tool. Sellers have a lot of leverage, and chances are, you will receive a high counteroffer.

Many motivated home buyers today consider an “automated” method: A creative “escalation clause” can help give you the competitive edge.

Here is how it works: Say you put in an offer of $260,000, and someone comes along later and offers $265,000. The clause might include instructions to match it, or to offer $5,000 more than the highest offer, so your offer automatically goes up to $270,000.

The escalation clause can also include a “cutoff,” or a maximum amount - say $275,000. If someone comes along and bids $280,000, you are not going that high. Make sure you qualify for that “maximum” amount. Your Bay Equity loan officer can help figure an upper limit.

Be wary. While it seems almost foolproof, there are certain disadvantages.

If the seller knows your maximum offer up front, it could sacrifice some power at the negotiation table. And while not likely in today’s hot market, it is possible that yours will be the only workable offer. You do not want to lose any advantage.

But that is why you need a skilled real estate agent. They will help submit an offer close to the actual top limit, which should allow you to narrow the gap and negotiate in smaller increments.

Make sure there is a contingency allowing you to back out if the lender appraisal comes in lower than your offer, and make sure to have another contingency for problems discovered during inspection.

Bidding wars are increasingly the norm. More than 70% of listings received competing offers in April, an all-time high.

Half of all purchased homes fetched more than list price, with the average sale-to-list price ratio reaching a record high of 101.7%. That means the average seller got 1.7% more than they were asking for.

In June, home prices passed a record high of $365,000, up 24% annually. The homes that hit the market moved fast - an average of 14 days - and 56% sold above asking price.