The San Diego real estate market is a hot market, for sure. Many sellers are seeing escalation clauses and multiple bids so how will buyers compete? We've been seeing the return of the escalation clause. This additional addendum is supplied with the original offer stating that the buyer is willing to pay a certain amount over the highest priced offer if the seller should receive another bona fide offer. There's usually a cap that the buyer is willing to pay as well. For instance: if a listing is priced at $500,000 and the buyer is willing to pay up to $600,000 for the property, they can state in the escalation clause that they are willing to pay $10,000 over another higher-priced offer up to the $600,000. So, if another bona fide offer, which has to be proved to the buyer, comes in at $550,000, the original buyer has agreed to pay $560,000 over that last offer. If another offer comes in over $600,000, the original escalation clause is void unless the seller just chooses to take the lower-priced offer.
So, are these escalation clauses wise and are there any disadvantages?
Most proficient and experienced real estate agent in the San Diego market understand an escalation clause, but you still might find agents that are unfamiliar with the practice. Because of this, they are likely not to explain this to the seller either and they could reject the offer altogether. This is unusual as most of the time the buyers agent will explain what's going on.
There's also the risk that the buyer is going to pay more than what the market can actually support. For instance, if the buyer needs to take out financing and the appraisal doesn't support a $600,000 offer, or whatever is a highest price the buyer needs to pay, then the buyer will need to make up the difference, something that most financed offers can't do. If the buyer is paying cash, they can pay whatever they want, but they are risking the fact that the home is not worth what they are willing to pay for it.
This also brings up a different issue as well; the seller now knows how much the buyer love the home and it kinda gives away the negotiation strategy. If you don't mind, it's a great way to make a higher bid and get the house you really want.
For more information on escalation clauses or if you're looking to win out in a bidding war on the condo or home you really want in San Diego give me a call.