If you are an active or previous home buyer, then maybe your agent has told you at one point or another that your offer wasn’t accepted because your competition used an escalation clause. If you are a former seller, maybe you hit the lottery and had the opportunity to accept an offer with an escalation clause. And maybe, just maybe, you have never heard about the escalation clause and you don’t know what the hell I’m talking about. This strategy in a real estate transaction can help you or hurt you, and In this article I’m going to:

1. Define the escalation clause
2. Show you how I apply it when working with home buyers
3. Show you how I handle them as a listing agent

What Is The Escalation Clause?

In traditional business jargon, an escalation provision, or clause, is a contractual instrument that increases a price when certain conditions are met. In residential real estate, they are found in examples of a bidding war, defined as a situation in which two or more prospective buyers are competing for a property, driving up the market value in the process. For our own definition, we consider the escalation clause to be a clause written into the contract to purchase that indicates a buyer will pay a nominal amount over the highest current offer price. While not always the case, typically the escalation clause equates to an offer that is significantly higher than the asking price. Buyers often like the escalation clause because they want their offer to be competitive, but are afraid to outbid themselves. They look to this device to make their offer better than the next, but there are also significant pitfalls that a home buyer can run into.

“Buyer to pay $X above the highest offer price.”

How I Use It, And When to Use It

The obvious use case for the escalation clause is a highly competitive market. We haven’t seen a buyer’s market since the 2009–2012 years immediately following the recession, so should we be using it all the time? Of course not. I recommend the use of this tool under special circumstances, and with many caveats. When buyers find themselves losing out over and over again, it means that either I am not preparing them properly for the competition they are facing, they are not ready or willing to compete in the price point, or they are just extremely unlucky because all of their lost offers were great, and they were edged out. I’ll typically recommend this as the nuclear option for the latter case, or, a case in which clients need to secure housing quickly. I’ve written before on what happens when a home buyer “chases” the market, and sometimes the escalation clause can help stop that bleeding.

Starting a Home Search With The Best Buyer’s Agent in 2022

Well, obviously you just hire me, right? I’m kidding of course. I’d be flattered, but this is for the many of you out there all over the country, in different markets, that don’t necessarily know what to look for. Good representation is worth its weight in gold.

I’m fortunate in My market to have wonderful colleagues that do a tremendous job at representing their clients, but I have seen what bad representation can do too, from the perspective of an agent on the other side of a transaction. It will cost you as a home buyer precious time and money. 87% of home buyers are using a REALTOR®, and there’s a good reason for it. We just want to make sure that you are paired with the right one. Here’s My no nonsense guide to hiring great representation and setting your home search up for success.

1. Look for a REALTOR®
Let’s start with the obvious question: What’s the difference between a real estate agent, a broker, and a REALTOR®? From the perspective of a home buyer or seller, there is no functional difference between a real estate agent and a broker when it comes to client representation. In Massachusetts there are two different licenses for the two. A broker can operate a brokerage, and manage sales agents, and a salesperson may only practice real estate under the license of a broker.

2. Look at the number of recent sales

More sales equate to experience. No transaction is going to be the same, even under ideal circumstances. Selling more houses means your potential representation is going to be well-versed in the many different situations you could encounter. There is no substitute for experience.

3. Ask For References

References for the agent you’re thinking about hiring, as well as reviews can speak volumes. Even when a past client is solicited by the agent to write a review, the fact of the matter is that the client probably had a good experience. Take it from me, there are so many things in a transaction that can and do go wrong, and sometimes the agent will take the blame for things that may not be in their control. If the agent has a large number of client reviews, it’s more than likely that they are pretty effective at their job, because they’re the ones that have to prevent and step up to fix any issues.

“The average home buyer may not be able to tell the difference between a routine occurence and a major issue. It’s the job of your representation to be able to articulately explain it to you in a way that empowers you to make the right decisions.”

Three years ago I got together with My colleague Krishna Malyala, a REALTOR® from New Jersey, with the intention of teaming up to improve the home buying process. Krishna and I initially met through a technology-focused group called CyberProfessionals led by the late Linda Davis, a real estate legend. Krishna had become an agent over a decade ago after trying to buy a home, and like many, was frustrated with the process and lack of available answers as to the cost of living. A former VP of Innovation at Citi, Krishna assembled a team and began the process of building TLCengine, a double nomenclature of tender love and care and the true cost of living.

TLCengine was originally software you could subscribe to that allowed an agent to provide a home search to their clients, but eventually found its way into listing portals with a direct integration. Whenever a user looks at a property detail page, they would have the ability to enter their own financial information into a widget that would calculate their cost of living in that particular home using AI and predictive analytics. The above video is a full demo of the tool.

I can’t tell you how many times I get the question; “How much are utilities?”. It’s a great question and all, but I’m not exactly sure what temperature you like on average, and what the bill looks like for this particular house. Oh, and by the way, the seller never really feels like digging through old bills to provide it to you either. The cost of living tool takes the number of people in your household, looks at the square footage of the property in question, and then connects to the energy company directly to estimate what the heating and cooling looks like for you on a monthly basis. What other piece of technology does that?

Of course it’s so much more than that. Interest rates change constantly, and your income, credit score, and tax bracket are going to make your monthly financials look very different to the next home buyer. This software makes those calculations for you, and provides the basis for a buyer to make good financial decisions using your own data. Krishna set out with the mission of building cost transparency into a real estate purchase, and I was very intent on giving My clients that value.

How We’re Addressing Affordability In Real Estate

How original, a real estate professional screaming about the importance of homeownership from the rooftops. I know, it’s cliché, but at least it’s something I’m passionate about. I saw an article published on Yahoo Finance yesterday, written by Dalton Brewster, that discusses the dramatically changing real estate landscape and what that means for generations that would normally be purchasing homes. I’m looking at you, fellow Millennials. Dalton covers how much more difficult it is to purchase a home compared to how it was decades ago (true), and how higher inflation and lower wages have been crippling to aspiring homeowners (also true). Not to mention the generation suffocating under the massive pile of student debt (sadly true). Another emerging trend is the investment in single family residential homes that’s sucking up a lot of formally available inventory, further driving up the price. It’s really not a fun time to be a home buyer right now.

Dalton also covers the hidden costs of homeownership and how it also adds a burden to aspiring homeowners; property taxes, HOA fees, insurance fees, maintenance, etc. and I immediately did one of these:

This I can help you with. Very easily in fact. In 2020 I joined My friend and colleague, Krishna Malyala to reposition his startup called TLCengine. Our goal was to combine real estate brokerage services with game-changing technology to deliver price transparency to, well, you. I can’t increase your pay. I can’t cancel your student loan debt (call your representatives), and I can’t stop investors from scooping up your dream home and renting it back to you, but I can help show you affordable homes and where to find them. That’s My job as a REALTOR® after all.

TLCengine is the magic that powers MikeDelRose.com using AI and predictive analytics. What we do is connect the listing data from homes on the MLS, bring in big data in terms of real time interest rates, energy costs, insurance rates, commuting costs, etc. and add in your very own financial profile. We plug in this data into a big ‘ol calculator on the back end and spit out with a good degree of accuracy what it would cost you to own the listing you’re looking at online, all in. We even show you the maximum offer price you could make based on your own debt-to-income ratios the banks are going to look at when giving you a loan. Cool tool, right?