Bigger Bids Aren't Always Better Bids

First, the seller should weigh the likelihood that the price offered will yield his anticipated net amount at the closing table. In other words, the more contractual rights the buyer retains to reduce the price (appraisal language) or to force the seller to have to pay for things (repairs or credits), the less certain the seller is that his profit will be unaffected.

Second, the seller should consider the financial ability of the buyer making the offer to close on the closing date -- just because a buyer says he will pay $30,000 more than the asking price doesn't mean that he can do it.

Finally, the seller should consider the nonfinancial terms of the offer (settlement date, rent-back offered, earnest money, etc.) to determine which works best given the seller's situation.

Escalation Clause

· Description: An escalation clause is a common addendum to the contract in multiple-offer situations. This clause typically provides that if the seller receives one or more additional offers to buy the property that result in net proceeds to the seller equal to or greater than the net proceeds of this buyer's offer, then the sales price in this buyer's offer will automatically increase by a stated amount up to a capped price.

· From the buyer's perspective: An obvious weakness of an escalation clause is that it tips the buyer's hand to the seller. That means an escalation clause is not always in the best interests of a buyer.

We advise our buyer clients to use an escalation clause only if a certain combination of factors is present: The seller has established a deadline for presenting offers; we know that there will be at least two other offers; and our buyer client is willing to offer a price greater than the seller's asking price.

If all of these factors are present, then we believe it's generally advisable to use an escalation clause. That allows the buyer to offer the seller's asking price with an escalation clause capping at the price that the buyer would have otherwise offered outright.

If the buyer just offers the higher price outright, he essentially creates a situation where the seller either accepts or rejects the offer at that higher price. However, by using an escalation clause, our buyer has a chance that his offer will be accepted at an amount below the higher price.

For peace of mind, when using an escalation clause, the buyer should think of the cap in the escalation clause as the amount he is offering.

· From the seller's perspective: A common misconception is that a seller is not allowed to make a counteroffer for more than his asking price. This is not true. An escalation clause ostensibly tells the seller the maximum price a buyer is willing to pay for the property. There is no reason why the seller cannot counter a buyer's offer at a price equal to or greater than the cap in the buyer's escalation clause.

Of course, by countering the offer, the seller loses some control of the situation and risks having the buyer walk away. Another option for the seller is to ask the buyer to resubmit his offer at a desired price. By asking orally, as opposed to countering in writing, the seller is not rejecting the buyer's original offer. If the buyer says no, then the seller still has a valid offer from the buyer.

Appraisal Language

· Description: A standard condition for a lender to lend money for a home purchase is that the property receives an independent appraisal at or above the purchase price. Because the purpose of the appraisal is to determine the fair market value of the property, this condition assures the lender that there is sufficient collateral for the loan. If the condition is not met -- that is, the appraised value comes in less than the purchase price -- then the lender may reduce the amount of the loan or even deny it.