This Is the Shortest-Lived Real Estate Trend of 2021
Just like trends in design and fashion, popular real estate crazes can come and go. This means that things that were once super common (remember when the prevailing advice was for sellers to bake cookies during an open house to make their home smell warm and inviting?) can quickly lose popularity. This year, it seems the once ubiquitous escalation clause has found itself on the chopping block.
What is an escalation clause?
An escalation clause is a real estate device used by a buyer who wants to ensure that a seller knows that their offer is solid, according to Kathleen Kuhn, president of MooveGuru. “With [an escalation clause], the buyer is also letting the seller know that they are willing to increase the offer if other higher offers come in afterwards,” she says. These devices were used to offer immediate and substantive counter-offers during a highly competitive year for real estate. For example, a borrower may have their real estate agent submit an offer letter saying they want to purchase a home for $250,000 with an escalation clause stating if the home received multiple offers, they would be willing to increase their amount to $275,000.
The pandemic made these clauses very popular.
Over the past 20 months, the real estate market has done some truly remarkable things. Not only did the demand for homes feel higher than ever, but the inventory that hopeful homeowners had to choose from was incredibly small. This created the perfect storm for house hunters, who found themselves having to pull out all the stops to purchase any home at all.
“The market was definitely the driver, as so many deals faced multiple offers,” explains Kuhn. “During this hectic period, buyers felt the need to use escalation clauses to make their offer more appealing to give them an option to ‘up their offer’ if higher offers were received.”
Their popularity has waned.
Just like many trends, escalation clauses eventually fell out of style. While the market isn’t exactly balanced yet, people are moving away from using escalation clauses. Borrowers quickly discovered that escalation clauses tipped their hands and let sellers know exactly how much they were willing to pay for the house. This increased its implied value, and sellers realized they lost their ability to negotiate.
What comes next?
It’s hard to predict what the next biggest trend in real estate will be, but considering the market still remains hot — with little sign that it will follow the trends of years past and slow down as we come into the holidays and winter months — it’s not a stretch of the imagination to assume that the next trend will also be about hopeful homeowners looking for ways to stay competitive in today’s market.
Buyers can probably still expect to see a lot of calls for “highest and best” offers, and should still plan to pen some convincing letters to sellers about why their offer should be considered even if it’s not the most competitive one they’ve received. Even though escalation clauses fell out of favor almost as quickly as they became popular, don’t expect them to disappear altogether. If the past 20 months have taught us anything it’s that things can, and will, change in an instant.