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You have found the house of your dreams and you are ready to make an offer. Unfortunately, you suspect others will be making an offer as well. Your realtor suggests the possibility of an escalation clause. So what is this clause? And when is it wise to use one?
What is an escalation clause?
An escalation clause is a real estate contract that states the buyer is willing to escalate their bid to a certain level if competing offers are present. In other words, the potential buyer states, "I'm willing to pay X for the house, but if there is a higher competing offer, I'm willing to increase my price to Y." This clause may sound simple, but there are also a lot of things to consider when potentially using the clause.
What are the components of an escalation clause?
While escalation clauses will differ some, there are three main components to an escalation clause.
- The original offered purchase price - this is the offer the buyer is making on the home.
- The amount the price will be escalated above a competing bid. For example, do you offer to escalate $2,000 more or $5,000 more than any competing bid?
- The maximum amount the buyer is willing to spend. For example, the buyer states he will escalate $3,000 above competing offers up to a price of $315,000. Consequently, if a competing offer comes in at $313,000, that competing bid would win because the escalated price would raise the offer above the escalation limit.
Are escalation clauses always accepted?
Some home owners and real estate agents will refuse to accept an escalation clause. Instead, they expect a buyer to put in the maximum amount that buyer is willing to spend from the get go. Sellers may prefer this method, because it forces competing buyers to attempt to outbid each other on the first try, often driving the price up.
When is it wise to use an escalation clause?
Escalation clauses are generally only advised in situations where multiple offers are expected. An escalation clause lays all of the buyer's cards on the table. A seller immediately knows from the clause just how high a buyer is willing to go. If there are no competing offers, your offer technically remains at the orgininal price. However, a realtor representing the seller will likely suggest a counteroffer since they know you are willing to pay more. Consequently, you give up a good deal of negotiating power with an escalation clause.
This sacrifice, however, can be worth it in some scenarios. For example, if a seller's realtor has made it clear that there are multiple offers that will all be reviewed on one day, with one offer selected, it may be wise to use an escalation clause. In this instance, no negotiation is expected, consquently the escalation clause allows you to 'negotiate' per say in the face of competing offers.
If you are considering an escalation clause, your realtor should be able to guide you as to whether the clause is a wise choice in your specific situation. The possibility of such clauses, as well as the complexity in knowing when to use them, is why you have a realtor in the first place!
Looking for an experienced realtor to help you through the often confusing process of negotiating and home buying? Let Augustedge help you find a clear path forward.
From farming in Warden, WA, to living in Australia and then back to Wenatchee, Iâ€™ve always been profoundly aware of the fundamental need to help others. Whether through their financial picture or he....