When real estate markets have limited inventory (as is the case with the current Prescott-area real estate market), Buyers frequently find themselves in the unenviable position of competing in a multiple offer environment. In this case, the Seller typically counters, letting the potential Buyers know that they have received multiple offers, and asks the Buyers to come back with their "highest and best" offer.
This scenario can be quite stressful for everyone involved, particularly the Buyers. While there are ways to make an offer more attractive (cash vs. financing, substantial earnest money, a short inspection period, a quick close, etc.), it often comes down to price. The question for the Buyers then becomes, "How high are you willing to go to win this bidding war?"
This is a precarious position for Buyers, and here's why: Let's say the home is listed at $850,000 on Thursday, and the Sellers have indicated that they will review all offers on Monday evening. By the end of the weekend, there are numerous inquiries and five offers (this is very typical of the current Prescott real estate market). At this point, a multiple counteroffer asking for the highest and best is sent back to the five interested Buyers, and the bidding war begins. Usually, at least one of the Buyers will drop out at this point, so four Buyers are asked to duke it out. Each Buyer has no idea what the others will bring to the table, so the tendency is to go as high as budgets and desire for the property will allow. The result is generally very favorable for the Seller, but it often stretches Buyers higher than they were hoping or needing to go.
In a current or expected multiple offer situation, a strategy that we often suggest to our Buyer clients is to include what's called an "escalation clause." Using the same scenario above, Buyers indicate the base price where they agree to begin, but then state that their offer will be increased to X amount over the highest competing offer, up to a certain maximum amount. So, for instance, an initial offer of $850,000, increasing to $1000 over the highest competing offer, up to $875,000. This approach can potentially save Buyers thousands of dollars, because they aren't forced into their absolute highest and best ($875,000) immediately and/or unnecessarily.
In a highly competitive real estate market, it's important to work with professionals who can use creative (but legal and ethical) approaches to help you buy and sell your Prescott-area real estate. Escalation clauses are just one strategy our Luxury Prescott team uses to close the deal - if you're thinking about making a move, we're here to help!
