“Highest & Best” vs Escalations
Offers vs Escalations:
The major difference between offers and escalations
Which strategy is better
How to know when to use which strategy
Watch the video to get the full breakdown
Mike Novak here, from the Novak Team over at Keller Williams, and today I wanted to break down the differences between offering what we call your “highest and best” offer vs using an escalation addendum.
In our current market, many homes are selling for 3-9% more than the price they were listed for, so the question that I get asked frequently is what is the best way to determine the offer price and how to structure the offer.
When a client of mine likes a home and is considering putting an offer in, I will pull comparable sales for them. These are homes that are similar in size, age, condition and near the subject home we are thinking about offering on.
I will also chat with the listing agent to see how many showings they have had (a barometer of how many offers they are likely to receive), and how many other offers they have in hand at the moment, if any.
Many sellers are commonly using an offer review date for their listing, meaning that they are putting the home on the market and setting a date that they will review offers. Sometimes sellers will accept an offer before the review date if it is compelling and well written.
Let’s go ahead and define the two different types of offer strategies so we have context to what we are discussing.
“Highest and Best” offer: this is commonly going to refer to placing you highest and best offer on the property without an escalation addendum. Say the home is listed at $500k and you offer $575k with no escalation.
Escalation offer: this is commonly going to refer to the practice of incorporating an escalation addendum into your offer. The addendum identifies two major components, cap and increment. The cap is the highest you will go no matter what, and the increment is the amount you will beat the next highest offer by.
I typically coach my clients to use around 1% increments and to go to a cap that they feel comfortable with the monthly payment on. It is important to note that if another offer is higher on their cap, they could potentially win the home (other terms matter as well).
So which strategy is better?
It depends on the situation.
If you are trying to get your offer accepted before the review date, you may want to consider using the highest and best approach, as putting an escalation addendum into your offer for this scenario could result in the listing agent/seller sitting on your offer and waiting for another one to trigger your escalation.
If you are offering on the review date, the escalation addendum strategy may be a better one. If no other buyer is willing to escalate nearly as high as you are, you may save some money with this approach.
Here is a scenario on what that could look like:
A home is listed for $600,000, and “Buyer #1” offers $600k, then escalates to a cap of $640,000 in $6000 increments. “Buyer #2” offers $600k, then escalates to a cap of $676,000, in $6000 increments thus likely winning the home at $646k. You can see “Buyer #2” is getting the home at one increment above the next highest buyer's cap. The listing agent is required to provide the winning buyer a copy of the other offer that triggered their escalation to ensure there is integrity and transparency to the process.
You can see that if “Buyer #2” had just offered their highest and best offer of $676k, they would have over paid for the home by $30,000 ($676k - $646k).
It is very important to note that other offer terms may sway a seller to take an offer with a lower cap, if that offer has stronger terms such as the ability to cover a low appraisal, has a waived inspection etc.
There is no right answer to which option is best, it is 100% scenario dependent and is something you need to discuss with your agent so you know what your options will be when you find that ideal dream home.
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