Escalator clauses have become so commonplace in today’s red-hot residential real estate market that real estate agents are having to navigate threats of litigation, while trying to educate and cater to their clients’ needs.
Shannon Buss, a broker associate at Randall Realtors in North Kingstown, said the practice of using escalator clauses has increased exponentially since the pandemic hit, when out-of-state buyers were swooping into Rhode Island to gobble up properties.
An escalation clause is language written into a purchase offer that incrementally increases a bid by a certain amount above competing multiple offers, much like with a live auction.
The fallout from use in today’s market: while they can be a useful tool, buying a property with them can lead to a confusing transaction process. The confusion comes from tracking varied, nuanced offers with price increases.
“Buyers are making decisions that are not comfortable due to the competitive nature of the market,” said Buss, who noted that buyers need to be educated about use of the clauses.
Buss said real estate agents have never seen this kind of demand before, and never dealt with terms that are so intense. Unfortunately, once the deal is made, buyers may regret the offer they submitted.
Buss said that a real estate expert witness told her five agents in other states in the last month have been sued by buyer clients in situations like these.
‘You need every tool in your toolbox these days because the inventory is so low.’
CYNTHIA MORETTI, Lila Delman Compass real estate agent
“It’s critically important that buyers understand the process and that ultimately the final decision is theirs,” she said. “If they have any doubts or confusion, it’s best not to move ahead until they’re crystal clear on what they’re signing.”
Buss said that escalator clauses have been around for more than the 17 years she has worked as a real estate agent. But now they have become standard practice, she said, as her firm sees them used on almost every listing.
“I’m happy for sellers; this is their market, but it can be painful for buyers,” she said. “When you work with both, it’s a really difficult balance.”
Ryan Antrop, a broker-manager at Residential Properties Ltd. in Cumberland, said his office sees the clauses used about 40% of the time by homebuyers.
“I think we’re going to continue to see the escalator clause used as along as our inventory is as ridiculously low as it is,” he said. “I think they will go away if and when the market changes and we’re not seeing multiple offers on properties.”
So, to compete in the market, buyers must get creative by writing a purchase offer that counters other bidders, he said. For instance, if a buyer’s escalation amount is $5,000 and a competing offer was $350,000, the clause would escalate the buyer’s offer to $355,000.
Antrop said most of the time buyers put a cap on escalator clauses, but sometimes they set a high offer number to guarantee the purchase. What ensues is a battle of the alpha buyer that drives the price up.
“There are situations where the buyer has put a ridiculously high number on their escalator clause and somebody else did the same thing,” he said. “At the end of the day, you can have an offer that is $120,000 over asking price, and you have to call them and ask them if it’s real.”
Antrop said that is not the norm, as most buyers tend to put a cap on their clauses. “Most people have a budget they have to stay within,” he said.
A listing agent in his office said there has been a trend toward listing agents telling buyers’ agents to not submit an offer with an escalator clause attached and just submit their highest and best offer. That’s because the clauses can be challenging to sort through, burdening the transaction process.
Cynthia Moretti, a real estate agent at Lila Delman Compass in Newport, said the best-quality offer will win every time. She noted that while only a few agents knew about escalator clauses a few years ago, they all know what they are now.
“You need every tool in your toolbox these days because the inventory is so low,” said Moretti, who has worked as a real estate agent for 21 years. “We’re at historically low interest rates and low inventory, causing this multiple-offer situation.”
It all creates the need for deploying escalator clauses, so clients have the best chance at acquiring a property.
“It can be tension-filled,” she said, noting that the seller is under no legal obligation to accept the highest price offered in an escalator clause.
Moretti said that sellers are looking for a quality, completely clean offer, meaning an offer that doesn’t require an appraisal, a home inspection or is contingent upon a buyer securing financing.
“That’s why cash can be king, if it’s a competitive offer,” she said, as it can make the clauses moot.
In the case of older sellers, Moretti said that she has been seeing a penchant for not accepting escalator clauses. “The sellers just want the best offer,” she said. “So, in that case, it means that no escalator clauses are allowed.”
Buss agrees. She said escalator clauses are a good tool to ensure that buyers are competitive when buying a home, but not all sellers accept them.
“You need to know, is this going to offend [a seller] or excite them?” she said. “So, the more information you can get in advance of crafting an offer, the better position you’re putting yourself in.”
Cassius Shuman is a PBN staff writer. Email him at Shuman@PBN.com.
