Should You Consider an Escalation Clause in Your Purchase Offer?
If you’ve recently been looking for a new home and believe that you’ve found one that’s right for you and your family, you’ll be tasked with working alongside your real estate agent to create a strong offer, and this is even more important in current times. In the event that the real estate market in your area is competitive, there’s a good chance that competing offers will be made to the homeowner, which means that your offer must be strong enough to be selected. If you find yourself in this situation, consider placing an escalation clause into your offer.
What Is an Escalation Clause?
An escalation clause is a common section that can be placed in a real estate contract. This clause states that the buyer who is making an offer is willing to increase this offer if the seller receives a higher offer from another buyer. Keep in mind that the clause will also include the total amount that the buyer is willing to pay.
If the buyer stipulates that they will escalate by as much as $5,000 above a competing offer with a max of $40,000, they could still lose the bid if another buyer makes an offer that’s $50,000 higher than their own.
However, escalation clauses provide buyers with a certain amount of protection in a competitive real estate market. Placing this clause in an offer also indicates to the seller that you’re serious about purchasing the property.
How Does This Clause Work?
There are three primary components that must be included in an escalation clause, which extend to:
• The original purchase price
• The amount that the buyer will escalate above the competing offer
• The maximum price the buyer will pay for the home in the event that multiple offers are received
These clauses also typically include how much the buyer will pay in increments if their offer is accepted. Once this clause has been added to the offer, it will usually be communicated to the seller’s Realtor from the buyer’s realtor. This type of clause is regularly placed into an offer if the seller can provide proof that they have already received another offer.
Let’s say that you provide the seller with an offer that amounts to $300,000. It’s possible to include an escalation clause that indicates the amount of money you’re willing to pay above any other potential buyers. You can set a maximum limit as well. This clause could state that you will offer $10,000 more than other buyers with a maximum limit of $350,000. If the homeowner receives another offer of $310,000, the escalation clause you included allows you to win out against the competing offer. Your offer will now be $320,000.
When to Use an Escalation Clause
Escalation clauses are best used when the broader real estate market favors the seller. When homes are being sold quickly, this means that there are more buyers than homes on the market.
If a seller receives multiple bids, it’s important that your offer stands out from the competition. The ideal time for an escalation clause to be used is during a bidding war. Keep in mind, however, that escalation clauses aren’t always the best solution and might not fit your situation.
When to Avoid an Escalation Clause
If the real estate market you’re in has more homes on the market than buyers, placing an escalation clause into your offer is unnecessary since competing offers are unlikely. Only consider using an escalation clause with your purchase offer if you’re confident that multiple offers have or will be made on the home that you’re interested in.
You should also avoid this clause if the seller doesn’t accept such clauses. There are times when a seller won’t consider an offer that contains an escalation clause. The real estate agent you’ve hired should be able to tell you if an escalation clause is likely to be accepted by the seller before you’ve made the offer.
Another issue with placing an escalation clause into your offer is that you’ll no longer be in a position to negotiate with the seller. When the seller accepts the clause, they will know the highest offer that you’re willing to make, which voids any possibility of negotiations.
If you’re in the market for a new home and find that the competition is high, placing an escalation clause into your purchase offer gives you the opportunity to automatically outbid competing offers and get the house of your dreams.