Escalation Clauses in Real Estate Contracts

By
Real Estate Agent with RE/MAX Properties

The first thing I remember learning in real estate licensing school was that no matter who an agent works for --- buyer or seller --- all parties to the contract must be treated fairly. We don't think much of that on the face of it because most of us think we always treat clients fairly.  But very recently I was confronted with a practice I've never encountered in my almost-25 years in real estate:  the Escalation Clause.

An escalation clause says something like "my clients will beat all offers by $2,000 up to $750,000."  It might be worded more gracefully, but the impact is the same: in a bidding war, no one but this client has a chance, particularly since these clauses aren't disclosed to the other potential buyers.  I'm left wondering how this could possibly be construed as "fair treatment."

Since the Bergen County, NJ market has heated up, and there is very little in the way of inventory on the market (I'm not talking about homes that have been overpriced and on the market for more than a year), some companies have told their agents to insert an escalation clause to avoid losing in a potential bidding war.  While I'm pretty sure sellers are jumping up and down with joy, this is an unfair practice and the Real Estate Commission should come down on it with all the power they have (but don't often use).

It is difficult enough for buyers to lose a home they love when all is done fairly, but how do we explain this kind of business to them?

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nj
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Rainer
35,035
Frank Nolan
Nolan Realty Team RE/MAX Estate Properties
I think you've missed an important point. Until there is an accepted offer there is no valid contract. So potential buyers are not a party to the contract as it hasn't been created yet. So the buyers agent in question has to treat their client and the seller fairly. They are not dealing with any other parties. Also There is no requirement that a seller or sellers agent disclose the terms or amount of other offers to any potential buyer or buyers agent, in fact most sellers agents keep all offers secret, even when they've been accepted, until close of escrow. It may seem unfair but it is not that different from a seller sending out counters to all the offers they have received. In this case, someone may be willing to pay more than $750k which would mean they have a good chance of securing a deal and beating out the other buyer as they have stated that $750k is their maximum offer. In the end it is up to the seller to accept the strongest offer which may not neccessarily be for the highest amount.
April 13, 2013 03:52 PM
Rainmaker
67,426
Kate Conover
RE/MAX Properties

Things may be different where you work, but the Real Estate Commission put a stop to this back in the early 90s.

April 15, 2013 09:50 AM
Rainmaker
775,208
Richard Weeks
Realtor, Associate Broker - Manager Business Development
Waller Group

The Texas Real Estate Commission has advised esculation clauses should not be a part of our contract, and would be considered practicing law.

October 15, 2013 07:28 AM
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Rainmaker
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Kate Conover

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