How an Escalation Clause Could Help You Purchase a San Diego Home
It’s no secret that the San Diego real estate market is red hot. Homes are selling at a lighting pace and bringing prices that continue to break records.
A recent report from NBS San Diego highlights this trend. Although perhaps a bit hyperbolic, this article, titled “Here’s Why It’s Nearly Impossible to Buy a Home in San Diego,” makes the claim that because of skyrocketing prices, saving for a downpayment is extremely difficult and could take up to 16 years.
There are some obvious flaws in this article, including the assumption that you need a 20% downpayment, but the overall conclusion, while a bit exaggerated, is fair. It is difficult to by a home in San Diego, as well as numerous markets across the country.
Unfortunately, the trend seems likely to continue, at least for the foreseeable future. Times of San Diego wrote an article in May of 2021 that claimed the market will stay hot through early 2022 with local housing prices climbing 16%! So if you plan on waiting for prices to drop, you may have a long wait. In fact, price escalations may merely become steady; it’s unlikely that they will actually fall from the current numbers.
But few people are abandoning the idea of owning a home in San Diego. Instead, they are adopting unique ways to increase their chances of having an offer accepted. From waiving contingencies to using a buyer’s letter, many real estate buyers are taking a highly-competitive approach to the home purchase.
One strategy is the escalation clause. With this technique, buyers are more confident that they are making a competitive bid without the risk of overpaying for a home. Understanding and properly utilizing the escalation clause could be the key to purchasing your dream home in San Diego, California.
Could an Escalation Clause Help You Buy a Home in San Diego?
Whether you are just entering the real estate market or have become frustrated because you simply can’t purchase a home at a fair price, an escalation clause could be a useful option.
Understanding the Escalation Clause
The escalation clause is a fairly simply concept. Essentially, you make a formal written offer on a house with a statement saying that if another buyer makes a higher offer, you are willing to go up in price.
Escalation clauses can be structured in a variety of ways, but they generally go up in increments and have a set limit. Increments are usually around $5,000 or $10,000, which prevents buyers from making an offer of merely $100 (or whatever) above the second buyer’s offer.
Here’s an example of how it might work: Suppose you are seeking to purchase a San Diego property that is listed for $700,000. Knowing that homes are selling fast, you make a simple offer at asking price. However, you include an escalation clause stating that if someone outbids you, you are willing to go up by increments of $10,000 to a cap of $750,000. So if someone offers $710,000 for the home, you would increase your offer to $720,000. If someone offers $725,000, your escalation clause would kick in and you would offer $730,000.
This lets you stay competitive and allows you to automatically make offers to purchase that are above the competition. You not only know that your offer will be competitive, but you’ll know that you won’t pay an amount that is significantly and unnecessarily above the competition.
Do Escalation Clauses Work?
In theory, escalation clauses have the potential to significantly increase your chances of success when bidding for a home. But does the theory play out in the real world? While there has not been a large amount of research on the topic, there is some evidence that suggests escalation clauses can be effective.
Redfin conducted a survey on bidding strategies, including waiving contingencies, making all-cash offers, and using an escalation clause. The escalation clause, they concluded had “no significant impact” on a buyer’s likelihood of success. On its face, this would make it seem that escalation clauses are a waste of time and energy.
But don’t give up on it yet. Redfin’s writer continues to say that “including an escalation clause (doesn’t) up buyers’ chances of winning a bidding war, that’s likely because (this strategy is) so common in a competitive market.” In other words, in a hot market like San Diego, the escalation clause is not a way to separate your offer from the competition, but merely a way to keep up with everyone else. It’s not that an escalation clause gives you an advantage, but that not having an escalation clause puts you at a significant disadvantage.
When is the Right Time to Use an Escalation Clause?
Escalation clauses are not always needed. However, there are certain situations and settings where they are more appropriate.
1. When You are In a “Hot” Market
What exactly makes a market “hot?” Two aspects in general should be considered: The first is home prices, specifically home price increases. If your market has seen steep increases in home values over the past months or years, you are likely in a hot market. The second is time on the market. If most of the top-quality homes are selling in less than a week, you are in a hot market. When the market is hot, you need to use escalation clauses to increase you chances of winning a home.
2. You are Feeling Desperate
You should never make a purchase on desperation. However, if you need to purchase a home soon, perhaps because you are starting a new job and don’t want to rent in your new location, escalation clauses could be effective.
3. You are Fed Up with the Home Search
Many buyers are becoming frustrated with the home-search process. With high prices and rapid sales, it’s easy to become fed up with purchasing. If you have made multiple unsuccessful offers and want to change your approach, consider adding an escalation clause.
You Deserve a World Class Mortgage!
While we can’t help with your real estate purchase offer, we can help you secure a top-quality mortgage. (Which is, after all, an important part of the offer!)
Contact our staff today and let us help you find the right mortgage for your specific needs!