Escalation clauses may force homebuyers into second thoughts

With more buyers now chasing fewer homes in many neighborhoods, interested parties are pulling out all the stops, including asking friends and business associates if they know of any homes that might be coming on the market in the near future.

A full-price offer with an escalation clause is now common on a newly listed home that is priced right, according to brokers affiliated with several multiple listing services.

Just as sellers had to work harder to get their homes sold a few years ago, today’s buyers have to work harder to succeed in many competitive markets.

An escalation clause in an offer indicates that the buyer will pay some fixed amount more than any competing offer the seller might receive up to a specific amount. For example:

“If the seller receives other offers on this property, the buyer will pay $1,000 more than any competing offer up to $350,000.”

This practice of bumping up offers often leads to second-guessing. For example, given the recent real estate meltdown, will I be paying too much for the home and suffer consequences down the road?

Most analysts believe that homeownership will continue to be a good long-term investment. Jed Kolko, chief economist and housing research leader for Trulia, the real estate website that recently purchased Market Leader for $355 million, said he doesn’t foresee another housing bubble soon because prices are unlikely to keep rising as fast as they are today, for three reasons:

Inventory should expand. Tight inventory is boosting prices today as buyers bid up prices on scarce homes; however, as prices continue to rise, more people will sell as they get back above water or decide to cash out, and more new construction will add to inventory.

Mortgage rates should rise. Low mortgage rates today increase buying power because borrowers can afford a more expensive house for the same monthly payment. Rates are likely to rise as a result of the strengthening economy, either through market forces or Fed actions, which – along with more inventory – should slow down price gains.

Investor interest should fade. Undervalued prices have attracted investors, who have helped push up home prices as they have bought and rented out homes. But as prices rise, investor interest will fade.

As most everyone in the housing industry knows, the biggest challenge for homebuyers this season is the lack of inventory, which is down 20-25 percent year-over-year and near its lowest level since before the housing bubble, Trulia reported. However, the survey shows that people think now is the time to buy, not sell: 75 percent of respondents agreed with the statement “it would be better to buy a home now than one year from now,” but only 32 percent of respondents (and just 29 percent of current homeowners) felt the same way about selling now rather than one year from now.

In a recent column, we explored how some sellers feel remorse for not asking for a higher asking price, especially when they are deluged with offers during the first week on the market. What are some buyers’ regrets?

The top regret (34 percent) was wishing they had chosen a larger home. The second most common regret (27 percent) is wishing they had done more remodeling when they bought the home. Third was wishing they had more information about the home before choosing it.

Among millennials – those age 18 to 34 – 70 percent have at least one regret about their current home, rental or most recent search process. Among millennial homeowners, 75 percent have regrets, compared with just 36 percent of homeowners age 55 and older.

The biggest difference in the regrets of homeowners and renters is that 23 percent of all renters wished they had bought instead of rented, while just 3 percent of homeowners wished they had rented instead of bought.

“When it comes to buying versus renting,” Kolko wrote, “regret pretty much goes in only one direction.”