Author Topic: Real estate escalation clause  (Read 1745 times)

dragonwalker

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Real estate escalation clause
« on: March 20, 2021, 03:05:14 AM »
I'm in the market to purchase a 2B2B condo in the suburbs near Los Angeles in a place called Santa Clarita. I've been looking for a couple months and today I found the place that I really like. It just came out on the market Friday (yesterday) and I was able to see it later that day. The asking price is $375K.

I want to get this unit and I communicated this to my agent and we talked about various options and strategies and one of which is the possibility of using an escalation clause. This is a clause that states that I will exceed any other higher offer by some X dollar amount up to Y price.

The market in my area is red hot with even modest units selling same day or within several with multiple offers often exceeding asking price. Now zillow and Redfin price this unit at around $385K. There are few comps and the most recent unit in this complex of comparable size sold in Sept 20' at $362K but that might as well be 10 years ago in today's market. My agent believes the unit is worth $385K-$390K.

I floated the initial idea of offering $380K going up to a possible $385K. However I'm not certain this is enough. I am a first time home buyer so I'm not particularly experienced in real estate dealings, patterns, or tactics although I was with my mother who has bought her fair share of homes.

I've read various pros and cons about an escalation clause what do you guys think in this situation would it be a good idea? Some other points that make my offer stronger would be minimum of 25% down (possibly more) conventional loan, no sell contingency (I'm completely flexible with when I need to move in and can work with the seller timeline whatever they want), I happen to work at the financial institution giving the loan (apparently that is a good selling point my agent has used), I discussed possibly removing the appraisal contingency because I'm putting greater than 20% down and in theory even if it came low I can make the difference up in cash.

In my last several homes I made offers I would occasionally get hit with the request to make a best and final offer. This is tough because if I'm hit with this again I can only respond with my "highest" but could lose it to something silly like an extra $1K. That's why I'm thinking the escalation clause could give me an advantage here. On the other hand I would have to disclose my maximum and the suggestion I have read is that it will incentivize a seller to hit that maximum and give their agent to push other buyers to make higher offers driving the price higher. The only other things are removing the other loan and inspection contingencies but I just can't bring myself to do that because of the massive risk in the event of sometime very unexpected occurring. Not even my agent suggested this but the thought had crossed my mine.   

I'm even considering writing a letter as several websites suggested lol but I have no compelling story (I'm just a single guy or saved a lot and wants to buy now because of a work relocation and the landlord at my home selling the place I rent) although perhaps I could write something about how I sacrificed a lot to get to the point now where I can purchase but I think it may come across as selfish. I could perhaps embellish the story a little bit but again the value of this tactic is debatable and not sure how much tangible benefit it may provide. 

What else can I do besides just pumping the offer to like $390K or something? Finally there is the question of what amount over the best offer should I set it to? My agent suggested $500 over and I'm thinking that may be adequate just to essentially match any competing offer because I think everything else I'm offering is in the seller's favor.
« Last Edit: March 20, 2021, 03:10:28 AM by dragonwalker »

MayDay

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Re: Real estate escalation clause
« Reply #1 on: March 20, 2021, 07:46:36 AM »
If you really want it, at that price, I am curious if it is worth losing for 500$.

To me an escalation clause should be enough to change their mind. 500$ us a drop in the bucket.

I can't tell you what to offer but in a hot market I'd aim for the high end of what your agent thinks it is worth, if it's worth it to you. If you offer 385 and someone buys it for 390, will you be disappointed? Or will you figure another similar one will appear?

From the info you shared, assuming you really want this specific condo, I'd consider offering 385 with an escalation of 3k over the highest offer up to whatever your absolute max is (maybe 390-395?)

windytrail

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Re: Real estate escalation clause
« Reply #2 on: March 20, 2021, 10:30:19 AM »
Are you concerned about the possibility of fraud? Example: seller has a friend who starts a bidding war with you to "escalate" your offer much higher than it would have been.

Is there an option to wait until the market sways back towards a buyer's market? Right now sounds like one of the worst times in history to be a buyer.

jeromedawg

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Re: Real estate escalation clause
« Reply #3 on: March 20, 2021, 11:45:34 AM »
We put an overpriced offer in on a home this past week with over 40% down, $2500 escalation clause and removal of both appraisal and inspection contingencies. We were outbid by a margin of $60k (which was just shy of $100k over the list price, which I believe was already listed above market comp according to my realtor as well as my own research) with over 50% down and the same contingency removals. This is in South OC. We have a 'ceiling' that we came up with that dictated this price over asking but the home was the perfect size and fit for us. Somebody just wanted it more. The story from the seller's agent was that these buyers are from Hollywood Hills (probably tech workers in Santa Monica/DTLA/etc renting and now realizing they can work remotely and want to live the OC Life) and got tired of being outbid after the last 5 attempts. The current environment has fostered an "Ebay emotional bidding" mindset with homes. It's ridiculous.

I'm not quite sure what we're going to do moving forward. Renting a 2/1 with 2 small kids is starting to get old...

Are you concerned about the possibility of fraud? Example: seller has a friend who starts a bidding war with you to "escalate" your offer much higher than it would have been.

Is there an option to wait until the market sways back towards a buyer's market? Right now sounds like one of the worst times in history to be a buyer.

I was wondering about this too - the seller's agent can say anything and can lie but their reputation is on the line doing shady stuff like that. I would think there could be major legal action if it's discovered that the seller was shill bidding the price up too. But in terms of proving that I don't know.

As far as the market "swaying" back to a buyer's market, I wouldn't count on it anytime soon. It could be at least a year or more before things start equalizing, and even then I doubt it'll be a buyer's market. It'll probably be corrected to a neutral market if anything. And if anything, prices will continue appreciating due to the fact that there's an obvious shortage of homes. Unless a bunch of people die off or they build new homes, or if all these people losing bidding wars (like us) decide to move out of state, there's going to be a period of lesser supply than demand and this is going to continue driving the prices up unless something else big enough to impact prices happens (not sure what that would be... maybe mass unemployment... all things nobody wants)
« Last Edit: March 20, 2021, 12:07:55 PM by jeromedawg »

Caoineag

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Re: Real estate escalation clause
« Reply #4 on: March 20, 2021, 05:23:16 PM »
We refused to use an escalation clause on our bid but 1) we were a cash buyer who didn't need an appraisal and 2) were prepared to lose the place if they didn't accept our offer. Our problem with the escalation clause is that there is 0 incentive to accept early. The seller would want to wait a bit to see what other offers there are. We wanted either an acceptance or a refusal because we didn't have time to waste waiting for their answer.

As it was, we were the 2nd full price offer that day but as cash we beat the financed offer (the property was back on the market because a financed offer fell through so added incentive to take our offer. The escalation clause would have cost us another thousand dollars for that same scenario.

That said, if you really want a certain property you are probably more likely to get it with an escalation clause since you don't have the advantage of being a cash offer. Oh and everyone still shopping in this market? You have my heartfelt sympathy. Even normally slow rural areas are brutal right now.

sonofsven

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Re: Real estate escalation clause
« Reply #5 on: March 20, 2021, 07:09:14 PM »
They work. I've been beaten out twice due to escalation causes.
The first time my realtor was pissed. He's old school and against them "on principal".
The second time he implemented an escalation clause with a cap and we got beat again.
No biggie.
Agree with the above that $500 seems low, $1000 "sounds" better.

uniwelder

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Re: Real estate escalation clause
« Reply #6 on: March 20, 2021, 07:42:42 PM »

Are you concerned about the possibility of fraud? Example: seller has a friend who starts a bidding war with you to "escalate" your offer much higher than it would have been.

Is there an option to wait until the market sways back towards a buyer's market? Right now sounds like one of the worst times in history to be a buyer.

I was wondering about this too - the seller's agent can say anything and can lie but their reputation is on the line doing shady stuff like that. I would think there could be major legal action if it's discovered that the seller was shill bidding the price up too. But in terms of proving that I don't know.

I bought a house (it was less than 100k) using an escalation clause in the offer.  Our buyer's agent was given a copy of the competing offer as proof.  The competing buyer actually had an escalation in their offer as well, but their ceiling wasn't as high.  I have nothing to contribute regarding fraud, besides vetting who the other buyer is--- direct family member, etc.

Omy

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Re: Real estate escalation clause
« Reply #7 on: March 20, 2021, 08:24:40 PM »
Can you do your inspection prior to offer? By eliminating that contingency from your offer you will show you are serious and it will give the seller peace of mind that you aren't going to ask for repairs. I agree with eliminating the appraisal contingency if you are comfortable making up the difference in cash. The fewer the contingencies the better.

Another creative approach is to pay some of the seller's closing costs. In my state, transfer and recordation taxes are traditionally split between the buyer and seller, but offering to pay 100% of those charges can make a big difference to the seller's bottom line.

I'm not a fan of escalation clauses, but if you decide to include one, the increment should be at least $2k.

Write the letter. Flatter the property (layout, condition, upgrades, cleanliness, proximity to work) and explain your relationship to the lender. Explain your flexibility with settlement timeframes. Include a very strong comittment letter from your financial institution. Have the president/loan officer call the seller's agent explaining how great you are as a buyer prior to the offer being presented to the seller. Consider giving a very large earnest money deposit with the offer...some buyers even agree to forfeit the deposit if they should pull out of the contract for any reason.

These are some of the tricks to winning an offer. When I was a buyer's agent, I also asked the listing agent if I could present my clients offer in person (to the seller and listing agent)...with my client in the car waiting to sign any changes and ratify the offer. This showed my dedication...and my client's seriousness about getting the property. I rarely needed to pull out the escalation clause if I was the only agent presenting in person and my client was right outside ready to sign.
« Last Edit: March 20, 2021, 08:54:57 PM by Omy »

jeromedawg

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Re: Real estate escalation clause
« Reply #8 on: March 20, 2021, 11:11:49 PM »
Can you do your inspection prior to offer? By eliminating that contingency from your offer you will show you are serious and it will give the seller peace of mind that you aren't going to ask for repairs. I agree with eliminating the appraisal contingency if you are comfortable making up the difference in cash. The fewer the contingencies the better.

Another creative approach is to pay some of the seller's closing costs. In my state, transfer and recordation taxes are traditionally split between the buyer and seller, but offering to pay 100% of those charges can make a big difference to the seller's bottom line.

I'm not a fan of escalation clauses, but if you decide to include one, the increment should be at least $2k.

Write the letter. Flatter the property (layout, condition, upgrades, cleanliness, proximity to work) and explain your relationship to the lender. Explain your flexibility with settlement timeframes. Include a very strong comittment letter from your financial institution. Have the president/loan officer call the seller's agent explaining how great you are as a buyer prior to the offer being presented to the seller. Consider giving a very large earnest money deposit with the offer...some buyers even agree to forfeit the deposit if they should pull out of the contract for any reason.

These are some of the tricks to winning an offer. When I was a buyer's agent, I also asked the listing agent if I could present my clients offer in person (to the seller and listing agent)...with my client in the car waiting to sign any changes and ratify the offer. This showed my dedication...and my client's seriousness about getting the property. I rarely needed to pull out the escalation clause if I was the only agent presenting in person and my client was right outside ready to sign.

Interesting tactics! I wonder how well this might work in the market I'm in. I think people around here are Googly-eyed for the highest "best and final offer" - maybe an all-cash offer slightly under the highest would work but anyone with that kind of money on hand probably wouldn't be looking in the area I'm shopping in hahahaha.

dragonwalker

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Re: Real estate escalation clause
« Reply #9 on: March 20, 2021, 11:33:12 PM »
So after discussion with my agent we decided not to go with the escalation clause. The clause would trigger with a verified offer in writing but I suppose if the seller and agent wanted to commit fraud they could pump up and make a fake offer. Very little incentive for an agent to do this and much to lose so I don't think fraud is the concern here.

I ended up giving up a lot of other things, like waiving appraisal contingency, paying for the A/C insurance and termite inspection, increasing the down, increasing the Ernest money deposit, no selling contingency, permitting the seller to stay a few days after closing, decreasing time of inspection report, working at the same bank I am getting financing from.

I made a strong offer well above asking. My agent was told multiple offers had already been submitted and the seller was looking to make a decision tomorrow. It came on the market Friday so as someone mentioned earlier the suggestion about getting the inspection done sooner wasn't even an option.   

Hopefully it works out for me tomorrow.

Omy

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Re: Real estate escalation clause
« Reply #10 on: March 21, 2021, 07:04:28 AM »

Interesting tactics! I wonder how well this might work in the market I'm in. I think people around here are Googly-eyed for the highest "best and final offer" - maybe an all-cash offer slightly under the highest would work but anyone with that kind of money on hand probably wouldn't be looking in the area I'm shopping in hahahaha.

In one case when I presented to the seller and listing agent, the listing agent had a spread sheet containing the terms from all 9 offers. I could see (and the agent told me) that my client's offer came in 3rd place. And it was not a cash offer.

The seller countered our offer to match the first place offer because she was confident that an agent who showed up to present the offer would make sure that this was an easy transaction all the way to settlement. My client's letter (saying she had only begun her search a week ago but instantly fell in love with the house) helped as well. We ratified the offer on the spot instead of the listing agent having to chase down signatures.

jeromedawg

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Re: Real estate escalation clause
« Reply #11 on: March 21, 2021, 10:51:48 AM »

Interesting tactics! I wonder how well this might work in the market I'm in. I think people around here are Googly-eyed for the highest "best and final offer" - maybe an all-cash offer slightly under the highest would work but anyone with that kind of money on hand probably wouldn't be looking in the area I'm shopping in hahahaha.

In one case when I presented to the seller and listing agent, the listing agent had a spread sheet containing the terms from all 9 offers. I could see (and the agent told me) that my client's offer came in 3rd place. And it was not a cash offer.

The seller countered our offer to match the first place offer because she was confident that an agent who showed up to present the offer would make sure that this was an easy transaction all the way to settlement. My client's letter (saying she had only begun her search a week ago but instantly fell in love with the house) helped as well. We ratified the offer on the spot instead of the listing agent having to chase down signatures.

Nice. Do you think this tactic would work even if there's someone higher up on the list who has made an offer thats marginally higher than the offer you made though? I guess it depends on how high but it seems like the margins have to be relatively close for them to be willing to agree even in the situation where you physically show up. E.g. I'm not sure this would have worked in our situtation where we had an offer $60k above ours. That's a lot of money to risk leaving on the table. Plus, everything these days is being done via docusign and remotely.

Omy

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Re: Real estate escalation clause
« Reply #12 on: March 21, 2021, 12:05:07 PM »
If my client has authorized a similar escalation (and I'm building a relationship with the listing agent and seller by meeting with them when everybody else is not), I like my client's chances.

In another multiple offer situation on a high dollar house, I was able to meet with the listing agent and sellers and discovered that the sellers were very concerned about getting moved out and into another house in time for settlement. Because I understood this, I was able to call my buyers and they offered a free 2 month rent back to the sellers. Because I showed up and and was able to respond quickly to their concerns, they trusted that we would be reasonable to work with through the process. In this case, my clients' offer netted a bit LESS to the sellers than the highest offer but it gave them peace of mind.

Other agents thought I was nuts for "wasting my time" presenting in person, but I looked at it as a time saver. I wrote far fewer offers per client than other agents because my clients usually won their first or second offer.

jeromedawg

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Re: Real estate escalation clause
« Reply #13 on: March 21, 2021, 01:36:31 PM »
If my client has authorized a similar escalation (and I'm building a relationship with the listing agent and seller by meeting with them when everybody else is not), I like my client's chances.

In another multiple offer situation on a high dollar house, I was able to meet with the listing agent and sellers and discovered that the sellers were very concerned about getting moved out and into another house in time for settlement. Because I understood this, I was able to call my buyers and they offered a free 2 month rent back to the sellers. Because I showed up and and was able to respond quickly to their concerns, they trusted that we would be reasonable to work with through the process. In this case, my clients' offer netted a bit LESS to the sellers than the highest offer but it gave them peace of mind.

Other agents thought I was nuts for "wasting my time" presenting in person, but I looked at it as a time saver. I wrote far fewer offers per client than other agents because my clients usually won their first or second offer.

I'm assuming you're referring to pre-COVID times (in terms of meeting with listing agents and sellers) but hopefully as things get better with vaccine rollout, etc meeting in person will become more of a norm. Right now a majority of interactions seem to be constrained to phone calls....maybe Zoom is better?

All very good points though - our other realtor friend said he just listed his place and it sold in two days (this is a newer highly desirable turnkey development in Irvine though). The buyers offered way above asking AND 4 months of rent back at no charge. It seems you have to get creative with alternatives to potentially beat out the highest bidder. I'm still not convinced a majority of sellers would accept an offer that's $50k-60k less than the best offer on the table (which also comes with a number of other concessions and great desperation [through the form of a letter begging for the house lol]). But I'll consult with our realtor to see if we can potentially implement some of the aforementioned strategies: offering X months of free rentback, offering to pay for the seller's fees/closing costs, getting the loan officer to contact the listing agent/sellers directly, Zoom/socially distanced meetings with listing agent/sellers, larger earnest money deposit, etc...

Omy

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Re: Real estate escalation clause
« Reply #14 on: March 21, 2021, 01:57:26 PM »
Agreed...if the difference between offers is significant, there's no amount of chit chat that will bridge the gap. By sitting at the kitchen table, I could usually determine what my clients needed to do to be competitive. Then it's their decision to decide how much they want the property. Also, when my client's offer was in 2nd or 3rd place and I was the only agent presenting, the seller would often ask if my clients would be willing to MATCH the highest offer. They rarely asked if we would go $2k higher than the highest offer (which is what an escalation clause does).

dragonwalker

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Re: Real estate escalation clause
« Reply #15 on: March 22, 2021, 11:08:40 PM »
Well I got a real hard reality check slap today. I just finished talking to my agent and she just found out that there were 14 other offers for the home and supposedly my offer $10K over asking was the lowest among all of them despite coming to an agreement with my agent that it was a solid offer. I was massively disappointed by how far we were off. However I was glad I was given a dollar amount to make our offer much more competitive which was $400K. This was from the seller's agent. I mean it's a nice place but who could have thought there was that much interest in it.

It didn't take me long to say no. This is a 1156 sq. ft. unit built in 81' 2B2B condo with one garage spot and 1 assigned covered spot where the same exact unit just last Sept 6 months ago sold for $360K. That's more than 10% in 6 months.

When is the real estate bubble going to burst or will it just keep going??! 

jeromedawg

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Re: Real estate escalation clause
« Reply #16 on: March 23, 2021, 12:20:44 AM »
Well I got a real hard reality check slap today. I just finished talking to my agent and she just found out that there were 14 other offers for the home and supposedly my offer $10K over asking was the lowest among all of them despite coming to an agreement with my agent that it was a solid offer. I was massively disappointed by how far we were off. However I was glad I was given a dollar amount to make our offer much more competitive which was $400K. This was from the seller's agent. I mean it's a nice place but who could have thought there was that much interest in it.

It didn't take me long to say no. This is a 1156 sq. ft. unit built in 81' 2B2B condo with one garage spot and 1 assigned covered spot where the same exact unit just last Sept 6 months ago sold for $360K. That's more than 10% in 6 months.

When is the real estate bubble going to burst or will it just keep going??!

Yep, it's ridiculous the frenzy that has ensued. It's literally a runaway train right now. We just put an offer in on a place $25k over asking and I'll be surprised if there aren't offers for $25k *more* ($50k over).  In South OC, places listed at $900k you can expect to go for anywhere from $950k and upwards. Places that are $850k you can expect to go for $900k and upwards. Places that are $800k or just below expect to go for $850-900k. It's really irritating, knowing that just a couple months ago this wasn't the case at all. I don't know how long this will be sustainable and the only thing that will slow it down in the near term is rising interest rates. Even then, my realtor said he doesn't think rates will go beyond 3.2% which isn't really that high in the grand scheme of things. If that's the case, I don't expect the frenzy to let up anytime soon. Maybe things will slow down for a short period during summer (after vaccines have rolled out and people start feeling comfortable vacationing) and or during the next Fall-Winter season. Unfortunately, I think a new baseline of prices is being set right now. If this keeps up, I will have to think more seriously about moving out of state - the more I go through this, the less and less appealing it is to live here.
« Last Edit: March 23, 2021, 12:24:59 AM by jeromedawg »

dragoncar

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Re: Real estate escalation clause
« Reply #17 on: March 23, 2021, 12:51:39 AM »
Well I got a real hard reality check slap today. I just finished talking to my agent and she just found out that there were 14 other offers for the home and supposedly my offer $10K over asking was the lowest among all of them despite coming to an agreement with my agent that it was a solid offer. I was massively disappointed by how far we were off. However I was glad I was given a dollar amount to make our offer much more competitive which was $400K. This was from the seller's agent. I mean it's a nice place but who could have thought there was that much interest in it.

It didn't take me long to say no. This is a 1156 sq. ft. unit built in 81' 2B2B condo with one garage spot and 1 assigned covered spot where the same exact unit just last Sept 6 months ago sold for $360K. That's more than 10% in 6 months.

When is the real estate bubble going to burst or will it just keep going??!

Don't want to pile on when you are having a bad day, but when you said earlier that your offer was "well over asking" I expected it to be more than 2.6% over.  I regularly see properties go for 10% over asking. 

As jeromedawg said, the ebay emotional bidding mentality is real.  So is offer fatigue (after you have a few rejected offers under your belt you start to say "ah what's another 10, 20, 100k?  That's only a few hundred more per month!) .  But very few properties actually warrant this level of enthusiasm.  Barring exceptional circumstances, like a truly unique view, you will find something that meets your needs eventually.


dragoncar

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Re: Real estate escalation clause
« Reply #18 on: March 23, 2021, 12:55:56 AM »
Even then, my realtor said he doesn't think rates will go beyond 3.2% which isn't really that high in the grand scheme of things

3.2 is great but I really doubt your realtor has better insight into rates than anyone else.  If he did, he could easily become a billionaire in the bond market.

I always expected the recent limits on mortgage deductibility would create some kind of price shelf above $750k-$1million since for high earners every dollar borrowed above the cap is like 40% more expensive.  But I guess that never happened 

dragonwalker

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Re: Real estate escalation clause
« Reply #19 on: March 23, 2021, 07:36:32 AM »
Being in it for the last few months is starting to make me a little bitter for sure. I know it's bad to say but some part of me is hoping for a real estate crash. Although this would probably mean my equities suffering heavily as well but also some part of me would feel better because at least that way it wasn't in my control and then I can buy at a lower more reasonable price even if I've lost more overall. Just hate the feeling of being ripped off by home sellers.

jeromedawg

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Re: Real estate escalation clause
« Reply #20 on: March 23, 2021, 08:59:38 AM »
Well I got a real hard reality check slap today. I just finished talking to my agent and she just found out that there were 14 other offers for the home and supposedly my offer $10K over asking was the lowest among all of them despite coming to an agreement with my agent that it was a solid offer. I was massively disappointed by how far we were off. However I was glad I was given a dollar amount to make our offer much more competitive which was $400K. This was from the seller's agent. I mean it's a nice place but who could have thought there was that much interest in it.

It didn't take me long to say no. This is a 1156 sq. ft. unit built in 81' 2B2B condo with one garage spot and 1 assigned covered spot where the same exact unit just last Sept 6 months ago sold for $360K. That's more than 10% in 6 months.

When is the real estate bubble going to burst or will it just keep going??!

Don't want to pile on when you are having a bad day, but when you said earlier that your offer was "well over asking" I expected it to be more than 2.6% over.  I regularly see properties go for 10% over asking. 

As jeromedawg said, the ebay emotional bidding mentality is real.  So is offer fatigue (after you have a few rejected offers under your belt you start to say "ah what's another 10, 20, 100k?  That's only a few hundred more per month!) .  But very few properties actually warrant this level of enthusiasm.  Barring exceptional circumstances, like a truly unique view, you will find something that meets your needs eventually.

It's a very dangerous place to be in once the bidding wars begin. But now it has gotten to the point where at least one person makes some outrageous shocker bid that's wayyyy over asking in hopes of bypassing the bidding war all together. I think the supply is far too low to meet the demand right now. It's like one cookie is in a very deep and narrow jar and you have 15 people trying to reach it first at the same time.

Being in it for the last few months is starting to make me a little bitter for sure. I know it's bad to say but some part of me is hoping for a real estate crash. Although this would probably mean my equities suffering heavily as well but also some part of me would feel better because at least that way it wasn't in my control and then I can buy at a lower more reasonable price even if I've lost more overall. Just hate the feeling of being ripped off by home sellers.

I understand where you're coming from and share similar sentiments but... it would take a lot for there to be a crash, and include many events that nobody else would hope for. One namely being mass unemployment... or another pandemic or disaster
« Last Edit: March 23, 2021, 09:02:48 AM by jeromedawg »

dragonwalker

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Re: Real estate escalation clause
« Reply #21 on: March 23, 2021, 10:01:35 AM »
Well clearly a pandemic/disaster did nothing but dump more fuel on the real estate market. Neither has high unemployment. Maybe this is the beginning of a new paradigm shift and home ownership near major metropolitan areas requires increasingly higher willingness to compromise one's financial future and best interest to own a home. 

Omy

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Re: Real estate escalation clause
« Reply #22 on: March 23, 2021, 10:30:46 AM »
Being in it for the last few months is starting to make me a little bitter for sure. I know it's bad to say but some part of me is hoping for a real estate crash. Although this would probably mean my equities suffering heavily as well but also some part of me would feel better because at least that way it wasn't in my control and then I can buy at a lower more reasonable price even if I've lost more overall. Just hate the feeling of being ripped off by home sellers.

It's a tough market if you're a buyer, but sellers aren't "ripping you off". If you owned a home you'd be thrilled that buyers are willing to line up and pay a premium to purchase your home. And you'd be wondering where the heck you're going to find a home to buy that isn't going to be impossibly competitive. I'm in that position now. I have a rental property that will sell for WAY too much...and I won't be able to find a newer property (1031 exchange) without paying a huge premium on the next property.

As a realtor, I hated being a buyer's agent in a sellers market. It's hard to advise your clients to bid really high and to tell them it probably still won't be enough. It's so frustrating for buyers to lose properties to other buyers who are more motivated than they are. That's why I was the weirdo who made sure I was the listing agent's best friend. By probing and sucking up, I usually knew what my buyers had to do to win in competitive situations. It was up to the buyers to decide how much they liked the property and if it was worth it to them.

It sounds like you made your best offer for that place...and that's all you should do if it's not that special to you. The real estate market should normalize at some point. It's way easier to purchase in a normal market...so maybe just rent until then? There are definitely markets and situations where long term renting may be the sounder financial decision.

jeromedawg

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Re: Real estate escalation clause
« Reply #23 on: March 23, 2021, 11:08:18 AM »
Being in it for the last few months is starting to make me a little bitter for sure. I know it's bad to say but some part of me is hoping for a real estate crash. Although this would probably mean my equities suffering heavily as well but also some part of me would feel better because at least that way it wasn't in my control and then I can buy at a lower more reasonable price even if I've lost more overall. Just hate the feeling of being ripped off by home sellers.

It's a tough market if you're a buyer, but sellers aren't "ripping you off". If you owned a home you'd be thrilled that buyers are willing to line up and pay a premium to purchase your home. And you'd be wondering where the heck you're going to find a home to buy that isn't going to be impossibly competitive. I'm in that position now. I have a rental property that will sell for WAY too much...and I won't be able to find a newer property (1031 exchange) without paying a huge premium on the next property.

As a realtor, I hated being a buyer's agent in a sellers market. It's hard to advise your clients to bid really high and to tell them it probably still won't be enough. It's so frustrating for buyers to lose properties to other buyers who are more motivated than they are. That's why I was the weirdo who made sure I was the listing agent's best friend. By probing and sucking up, I usually knew what my buyers had to do to win in competitive situations. It was up to the buyers to decide how much they liked the property and if it was worth it to them.

It sounds like you made your best offer for that place...and that's all you should do if it's not that special to you. The real estate market should normalize at some point. It's way easier to purchase in a normal market...so maybe just rent until then? There are definitely markets and situations where long term renting may be the sounder financial decision.

I think the bigger question is what does "normalize" mean? Does that mean that the current behavior and frenzy will settle down to lower levels to nil? Or does it mean that pricing will go back being closer to what the value would have been if none of this ever happened? Or both? I'm leaning more on the side that the current behavior and frenzy will settle down eventually and have a feeling that prices will only continue to appreciate faster than normal.

So that home that was bid up to $975k? By the time this frenzy has died down (and this could be years, right?), the same home and comparable ones will at least still be valued (and sell for) that much if not more (and likely the latter). All the stimulus and new money being printed isn't helping. While it might be good in the near term, it seems like we're just putting more duct-tape band aids on and at some point they have to come off (and it's not fun removing old duct tape....lol)
« Last Edit: March 23, 2021, 11:26:45 AM by jeromedawg »

Mr. Green

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Re: Real estate escalation clause
« Reply #24 on: March 23, 2021, 01:50:26 PM »
Anything can happen obviously, but it's hard to imagine that home prices in a lot of areas haven't been pushed unrealistically high and that a drop isn't coming. A lack of supply, a major temporary shift in where people want to life, record low interest rates, and record high building material costs have all contributed to prices being higher. I can't fathom how prices can stay where they are when lumber prices have fallen back to normal (half of where it is now), interest rates rise to 4% or higher, and the supply of available homes normalizes. In broad economic strokes it's impossible for prices not to fall under those conditions. But weirder things have happened.

Omy

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Re: Real estate escalation clause
« Reply #25 on: March 23, 2021, 02:17:12 PM »
Without crystal balls, we can't know for sure. My HCOL area is at all time highs with crazy escalations...and I'm considering selling and buying in the midst of it.

Inventory has been historically low. We have a one week supply of homes in a lot of areas...which is an indication of an unsustainable seller's market. In order to have a more normal/balanced market that's friendlier to buyers, you need a few months supply of homes. So if a lot of sellers and builders decided to flood the market by putting homes on the market right now, it would create a more normal market. But sellers are reluctant to sell because there are no good options to purchase and they don't want to be homeless and competing to find their next home. It will be interesting to watch.

jeromedawg

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Re: Real estate escalation clause
« Reply #26 on: March 23, 2021, 02:33:08 PM »
Anything can happen obviously, but it's hard to imagine that home prices in a lot of areas haven't been pushed unrealistically high and that a drop isn't coming. A lack of supply, a major temporary shift in where people want to life, record low interest rates, and record high building material costs have all contributed to prices being higher. I can't fathom how prices can stay where they are when lumber prices have fallen back to normal (half of where it is now), interest rates rise to 4% or higher, and the supply of available homes normalizes. In broad economic strokes it's impossible for prices not to fall under those conditions. But weirder things have happened.

Without crystal balls, we can't know for sure. My HCOL area is at all time highs with crazy escalations...and I'm considering selling and buying in the midst of it.

Inventory has been historically low. We have a one week supply of homes in a lot of areas...which is an indication of an unsustainable seller's market. In order to have a more normal/balanced market that's friendlier to buyers, you need a few months supply of homes. So if a lot of sellers and builders decided to flood the market by putting homes on the market right now, it would create a more normal market. But sellers are reluctant to sell because there are no good options to purchase and they don't want to be homeless and competing to find their next home. It will be interesting to watch.

Great insights. There are a few new build developments popping up in the area so I'm wondering if existing homeowners are looking to move into those and what percentage of new/first-time vs existing/looking-to-upsize there will be. I envision mostly first-time homeowners trying to get in now will start looking to the smaller new builds while certain existing homeowners may decide they want the larger models.
The biggest problem is with most of the existing homeowners who live in areas with low to no HOAs - these are the ones whose homes will be in the highest demand (amidst many neighborhood communities that have HOAs that cost more). There wouldn't be much motivation for these homeowners to move unless they were intending to relocate out of state. And in fact, the past two homes we've put offers on are exactly that - the owners are moving out of state... but I'd argue these are the minority of SFH/single-level/no-or-low HOA homeowners in my area. I think there a quite a few folks getting into older age who want to enjoy retired life and may even be fine with hospice care too, so staying put makes the most sense to them.

As far as sellers reluctant to sell because they can't purchase anything reasonable - this makes a lot of sense (for young families especially) if they're looking to upsize from their 2/2, 2/1 or 3/2 into something bigger. It's just too much sticker shock for most to handle and they're happy where they're at until something drastic/urgent causes them to want to move (expecting another child or terrible neighbors). It's kind of a stalemate for those homeowners but at least they have some form of stability.
« Last Edit: March 23, 2021, 02:40:57 PM by jeromedawg »

dragoncar

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Re: Real estate escalation clause
« Reply #27 on: March 23, 2021, 04:15:55 PM »
Personally I think normalization means that the frenzy will die down.  Thatís almost sure to happen.  A significant drop is less likely.  Remember that all the people buying now have major psychological price points at the current prices.  People absolutely hate selling for a loss, which is also magnified by leverage, and will only do so when absolutely necessary (the three Ds)

Stagnant home prices along with wage inflation is a decent hope

jeromedawg

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Re: Real estate escalation clause
« Reply #28 on: March 23, 2021, 04:32:38 PM »
Personally I think normalization means that the frenzy will die down.  Thatís almost sure to happen.  A significant drop is less likely.  Remember that all the people buying now have major psychological price points at the current prices.  People absolutely hate selling for a loss, which is also magnified by leverage, and will only do so when absolutely necessary (the three Ds)

Stagnant home prices along with wage inflation is a decent hope

So it sounds like the best thing to do, if we're really wanting to buy in our area, is to wait and see what happens but keep and eye out for any 'deals.'

I'm guessing, if pricing actually does stagnate as things calm down, current buyers (who have won their bids via frenzy buying) will feel buyer's remorse as they see homes going for slightly more than the list price of their home that they bid $50k+ up over. So in a couple years (again, assuming things quiet down), the comps for that $900k house that was purchased for $975k may look more like $925-940k...when comps actually matter again lol

Omy

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Re: Real estate escalation clause
« Reply #29 on: March 23, 2021, 05:33:15 PM »
In my area, August and December can be good months to pick up a relative "deal". Everyone (and their agent) goes on vacation in August. And sellers who are on the market in December usually need to sell. YMMV.

jeromedawg

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Re: Real estate escalation clause
« Reply #30 on: March 23, 2021, 05:41:57 PM »
In my area, August and December can be good months to pick up a relative "deal". Everyone (and their agent) goes on vacation in August. And sellers who are on the market in December usually need to sell. YMMV.

Makes sense... this is what I was thinking and I believe what my realtor had briefly mentioned at some point. Like there's a 'lull' period during the summer time when ppl go on vacation. I don't know if that was necessarily the case last year but I would anticipate at least a little more vacation activity this time around. Same with the holidays too. Really depends on how all the re-openings and handle on COVID is I would presume.

So what do people do when their agents "go on vacation"? Do they just reach out directly to the seller's agent or find the next available agent?

Omy

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Re: Real estate escalation clause
« Reply #31 on: March 23, 2021, 06:23:39 PM »
Your agent may put the offer together remotely...or will recommend a colleague who is covering for your agent.

Jon Bon

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Re: Real estate escalation clause
« Reply #32 on: March 23, 2021, 08:44:55 PM »
Makes me glad we are doing an addition. We toyed with buying a different house, put in a few offers. but there were double our current mortgage plus needing 200k, so in the end im glad we did not get them. I mean yeah construction costs are insane, labor is scare, and lumber is 3x what it use to be.

This cannot continue right?

These escalation clauses are a realtors dream.

Omy

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Re: Real estate escalation clause
« Reply #33 on: March 23, 2021, 09:25:08 PM »
Crazy escalations are NOT a realtor's dream. Buyers agents hate it because their buyer is unlikely to win and they have to put together and submit A LOT of offers that will go nowhere.

The listing agent has to review ALL of the offers with the sellers. 2 or 3 offers is fine, but when you get 10 or 20 or 60 offers with different terms it's a nightmare. You need to vet All of the offers: are the buyers qualified? are they likely to perform if they win? are the offers complete? etc. Then you get to spend hours going over the relative merits of the top 10 offers.

And if the house escalates $50k over asking, the realtor is likely making an extra $300-500 after broker fees and taxes. Definitely not worth all of the extra work.

jeromedawg

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Re: Real estate escalation clause
« Reply #34 on: March 23, 2021, 10:18:34 PM »
So the offer we put $25k over asking on? Nope - definitely not good enough. We were outbid by a buyer who offered an undisclosed amount well above all other offers that was also all cash. Right now there's *always* someone who wants whatever you want more than you do.

dragoncar

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Re: Real estate escalation clause
« Reply #35 on: March 24, 2021, 03:34:26 AM »
. Right now there's *always* someone who wants whatever you want more than you do.

Applies to so many things, too.  Like when the pandemic started and I needed a single package of toilet paper and the idiots were hoarding pallets full.  Luckily I never ended up in a bidding war

Omy

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Re: Real estate escalation clause
« Reply #36 on: March 24, 2021, 07:45:10 AM »
Another approach (which I don't recommend but can be effective on occasion) is to bid crazy high but KEEP your appraisal contingency in your offer.

Years ago on a house listed for $500k, my client bid $525k and was dissapointed that their offer came in 2nd place. A month later I noticed that the house closed for $500k. I was super annoyed and called the listing agent to ask what happened.

The listing agent said the winning offer had bid $550k but had an appraisal contingency and the house only appraised for $500k...and the seller accepted the appraised value and sold the house.

This approach only works if the competing offers have appraisal contingencies...and if you are prepared to pay the full price in the event that it does appraise for your offer price.

Omy

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Re: Real estate escalation clause
« Reply #37 on: March 24, 2021, 07:50:06 AM »
And if you really love a home that you lost, ask your agent to see if the seller will accept a backup offer. You may have to bump up your price to the winning offer, but you are now sitting in 2nd place and wont have to compete if the winning offer falls through. In our area, you can continue to look at other houses and make other offers while you are sitting in backup position.

jeromedawg

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Re: Real estate escalation clause
« Reply #38 on: March 24, 2021, 09:00:53 AM »
Another approach (which I don't recommend but can be effective on occasion) is to bid crazy high but KEEP your appraisal contingency in your offer.

Years ago on a house listed for $500k, my client bid $525k and was dissapointed that their offer came in 2nd place. A month later I noticed that the house closed for $500k. I was super annoyed and called the listing agent to ask what happened.

The listing agent said the winning offer had bid $550k but had an appraisal contingency and the house only appraised for $500k...and the seller accepted the appraised value and sold the house.

This approach only works if the competing offers have appraisal contingencies...and if you are prepared to pay the full price in the event that it does appraise for your offer price.

Problem in my area, I think, is that waiving of appraisal contingency (along with inspection contingency) is pretty much the norm. If you don't do that you're pretty much out - there are enough buyers willing to do this that it's a standard thing...unfortunately.

And if you really love a home that you lost, ask your agent to see if the seller will accept a backup offer. You may have to bump up your price to the winning offer, but you are now sitting in 2nd place and wont have to compete if the winning offer falls through. In our area, you can continue to look at other houses and make other offers while you are sitting in backup position.
Most of the current sales haven't been falling through. The closing times are pretty aggressive on all these sales from what I understand. And it sounds like there are so many offers on the table (I'm guessing upwards of 15-20 at least) that the sellers/sellers' agents are avoiding spending that much time reviewing offers. It sounds like it's overwhelming on that side too.

. Right now there's *always* someone who wants whatever you want more than you do.

Applies to so many things, too.  Like when the pandemic started and I needed a single package of toilet paper and the idiots were hoarding pallets full.  Luckily I never ended up in a bidding war
LOL - earlier on this time last year I saw people posting on Facebook and Nextdoor selling single rolls or batches of their toilet paper :T There was one guy back east who tried to capitalize on hand sanitizer as well, https://www.nytimes.com/2020/03/14/technology/coronavirus-purell-wipes-amazon-sellers.html, and ended up donating all of it to save face: https://www.nytimes.com/2020/03/15/technology/matt-colvin-hand-sanitizer-donation.html - generous but he was probably getting tons of backlash after getting publicly skewered....so donating was a total PR move.
« Last Edit: March 24, 2021, 09:04:30 AM by jeromedawg »

clarkfan1979

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Re: Real estate escalation clause
« Reply #39 on: March 24, 2021, 11:03:18 AM »
The escalation cause is becoming more "normal", however I personally think they are stupid. If I was a seller in a hot market, I would reject the escalation clause and ask for highest and best.

At a theoretical level, an escalation clause is a buyer trying to create leverage that does not exist. It's a game of poker. I personally would call their "bluff", reject the escalation clause and simply ask for highest and best.

jeromedawg

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Re: Real estate escalation clause
« Reply #40 on: March 24, 2021, 11:06:52 AM »
The escalation cause is becoming more "normal", however I personally think they are stupid. If I was a seller in a hot market, I would reject the escalation clause and ask for highest and best.

At a theoretical level, an escalation clause is a buyer trying to create leverage that does not exist. It's a game of poker. I personally would call their "bluff", reject the escalation clause and simply ask for highest and best.

This is sort of how I see it - if your max is $930k and you put in an offer of $915k with an escalation clause of $5000, what happens when the highest bidder offers $926k or more? You simply avoid putting the earnest money deposit in and walk away... the seller's agent I'm sure knows this game so if when see that, especially nowadays, they probably just call it BS and go with the offer that was higher, period. This avoids wasting time.

Dicey

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Re: Real estate escalation clause
« Reply #41 on: March 30, 2021, 02:40:43 AM »
Just catching up on this thread. To the OP, I must say @Omy's insights are golden. Really valuable information there. I'm not buying, remodeling, or selling anything at the moment, but I'm filing all this fantastic info away for future reference.

Omy, thanks for taking the time to share your hard-earned knowledge.

Also, just curious Omy, why do you want to do a Starker in this stark raving mad market? Why not let it ride?

norajean

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Re: Real estate escalation clause
« Reply #42 on: March 30, 2021, 06:00:48 AM »
Bidding wars are not a good buying scenario. There is too often at least one bidder who either delusional, misinformed about the property/market, being manipulated by their realtor or otherwise off their rocker. I have no interest in either being that bidder or, worse, outbidding that bidder.

The great thing about real estate is that there is often potential to spot overlooked gems. Never underestimate how idiotic the buying public can be nor how shallow their assessment of a property. If you can look past flaws which drive away bidders, you can pick up a gem. That has worked well for us.  The other strategy we like, of course, is buying during market lows when everyone else is scared and prices are falling.

The current market frenzy doesnít look like a bubble, just a tight squeeze. I expect it to cool off a bit in the next couple years, but donít see why prices would drop except in local markets which could be hit by economic problems or mass exodus for whatever reason.

Omy

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Re: Real estate escalation clause
« Reply #43 on: March 30, 2021, 09:13:08 AM »
Thanks for the kind words, Dicey.

Regarding the Starker, DH wants to fix it up, sell, and buy something newer that doesn't need as much work. I'm leaning toward fixing it up and renting for awhile longer because I don't want to pay a premium on the next rental in this crazy market (and I'm the one who does all the work when buying or selling AND I'm concerned about meeting the required 1031 deadlines in this frenzied market).

If the market was more normal, I'd be inclined to fix it up, sell and buy something newer since the current property was built in the 80s and it shows. Since this round of "fix it up" includes new carpet/flooring and painting everything, I'm not looking forward to making improvements that will be screwed up immediately by the next tenants.

I will try to remember to provide an update when we decide which way to go.


clarkfan1979

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Re: Real estate escalation clause
« Reply #44 on: April 03, 2021, 07:08:06 AM »
Bidding wars are not a good buying scenario. There is too often at least one bidder who either delusional, misinformed about the property/market, being manipulated by their realtor or otherwise off their rocker. I have no interest in either being that bidder or, worse, outbidding that bidder.

The great thing about real estate is that there is often potential to spot overlooked gems. Never underestimate how idiotic the buying public can be nor how shallow their assessment of a property. If you can look past flaws which drive away bidders, you can pick up a gem. That has worked well for us.  The other strategy we like, of course, is buying during market lows when everyone else is scared and prices are falling.

The current market frenzy doesnít look like a bubble, just a tight squeeze. I expect it to cool off a bit in the next couple years, but donít see why prices would drop except in local markets which could be hit by economic problems or mass exodus for whatever reason.

I normally do not like buying when there are multiple offers, but every situation is different. I bought a primary home in Hawaii in June 2018. The median sales price of the neighborhood was around 800K. There was a foreclosure for sale for 549K. In my opinion, the bank listed the house too low which was going to create a multiple bid situation. We could over-bid and still get a deal.

There were 9 offers total. We offered 603K and came in 2nd place. However, the deal with the highest bidder fell through and we got it. Even though we offered 54K or 10% over asking price, it appraised "as is" for 615K. I spent around 50K in rehab with myself doing some of the work. If I didn't do any of the work myself, it would have cost me 75K to 100K. 

One year later after 95% rehab was complete (June 2019), my real estate agent said it was worth 799K. We are going to put the finishing touches on the rehab in June 2021 and spend another 5K and it should appraise for 950K+.