With the strong seller’s market we’re experiencing right now and all of the bidding wars that are happening as a result, the escalation clause is receiving more attention than ever.
What is an Escalation Clause?
An escalation clause is a provision that is sometimes included in real estate purchase agreements. It is especially used when there is a lot of interest in a property. As the name implies, it allows buyers the opportunity to escalate — or increase — their offer in a chance to win the property over other interested parties.
The clause allows a buyer to increase their suggested price in order to avoid getting outbid. It states that the buyers are willing and able to outbid the higher offer, at least up to a certain point. But just because the clause is included doesn’t mean that their highest offer will be triggered.
Escalation clauses are used to make offers more attractive, and since buyers are using any means they can to make themselves stand out in today’s market, they are a smart strategy in situations where a buyer may be competing against multiple offers.
A typical real estate deal might involve some back and forth negotiation, but current market trends don’t always allow for that. Using an escalation clause gives buyer’s a little bit of a safety net, ensuring that an offer will be considered because it shows sellers that you’re so serious about buying the home that you’re willing to up your bid.
Why or Why Not Use an Escalation Clause?
Using an escalation clause can be a little anxiety-inducing because when a buyer submits their offer, they don’t know exactly how much they may end up paying. With that in mind, very interested buyers should use them only when they really truly want a property and are willing to pay up to the maximum amount of the clause.
Generally, an escalation clause takes the middleman out of real estate price negotiations. It keeps your offer in consideration, even if your initial purchase price may not be high enough on its own to win the deal.
But escalation clauses can make buyers nervous because they also kind of gives away their bargaining leverage. No one wants to tip their hand and tell the seller how much they might be willing to pay for the property.
How does an Escalation Clause Work?
There are three distinct parts of a real estate agreement with an escalation clause.
First the contract needs proof of a bona fide offer. The listing agent needs to be able to prove that another offer came in to the seller with a purchase price higher than your original one. This assures that they can’t just use a potential buyer’s escalation clause as an excuse to raise the sales price.
The escalation clause also needs to include specifics about the amount which will be used to outbid other higher offers. It should include bid increments, for example $5,000 or $10,000, by which a buyer’s offer would increase automatically in the interest of winning the bid.
The clause also needs to have a price cap. This is the maximum amount a buyer would be willing to pay for the property if an offer needs to be escalated. In other words, its the highest you’re willing to go to buy the property. Just be aware that if an offer comes that is higher than your cap, you offer will be taken off the table.
Escalation clauses are increasingly popular in today’s seller’s market where buyers are competing against so many other motivated parties. But before you decide to include an escalation clause in your offer, do the math for yourself and make sure you feel comfortable paying up to the maximum amount included in your escalated offer.
If you think there will really be multiple offers on the table, you definitely want the property, and you’d be upset if you lost the deal because your original purchase price was too low, you should consider including an escalation clause in your real estate offer.
Talk to your LIST WITH ELIZABETH® agent to discuss how you can make an escalation clause work to win your dream home.