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What is an Escalation Clause?

July 14 2018
by Leisl Bailey

 

Sometimes you just know that a home is right for you and you’re willing to go the extra mile to make it happen, so your competitive side comes out when making an offer.

 

If your heart is set on a certain property, you might consider adding an escalation clause to your purchase offer to edge out the competition from the onset and streamline the process of buying your home.

 

What is an Escalation Clause?

 

An escalation clause is a simple way of letting the buyer know how serious you are about a property. It is usually used in instances where the market is booming and it is likely that a particular property will receive multiple competitive offers.

 

Typically, homebuyers will use an escalation clause to bypass a competitive and drawn out bidding process and close on their dream property with less back and forth.

When included in an original offer, the clause lets the seller know that the buyer is willing to pay “X” amount (sometimes hundreds of dollars, sometimes thousands) more than the highest offer received on the property, but only up to a certain point.

 

A typical example of an escalation clause might look something like this:

 

Buyer Jane Doe agrees to pay $1,500 more than the highest bid received by the seller; however, she will not pay more than the asking price of $430,000.

 

This way, the seller knows that Jane is willing to counter any other offers received without needing to check in with her. In a perfect world, Jane would submit her offer with an escalation clause, sit back, relax, and then land her dream home.

 

But that’s not always the case…

 

Pros of an Escalation Clause

 

Here are some of the upsides of deciding to include this strategy in your offer:

 

There is Less Stress

 

Including an escalation clause in your original purchase offer could be seen as a “one and done” move. It can be really stressful to make an offer on a home you’ve fallen completely in love with to then be forced to sit around, worrying and waiting that someone else has outbid you.

 

With an escalation clause, you can get rid of all this guesswork and know that you are still in the game until the very end.

 

There is No Money Left on the Table

 

Even if you are head over heels for a home, you still don’t want to pay more than you absolutely need to for a property. By including an escalation clause, you are protected financially because your offer only technically increases when other buyers begin to bid. When they stop submitting new offers, the price you pay for your new home is the lowest possible.

 

Cons of an Escalation ClauseWhat is an escalation clause

 

As with anything in the home buying process, there’s always a flipside. Here are some of the cons of including an escalation clause in your purchase offer:

 

You Play Your Hand Early

 

When you include an escalation clause in your original offer, you put all your cards on the table at once and essentially lose all of your negotiation power.

 

The seller immediately knows the top end of your budget and, although unlikely, might try to enforce that price even in the absence of the offers you tried to compete against.

 

You May Confuse the Listing Agent or Seller

 

Escalation clauses require constant calculations as each new “traditional” (i.e., WITHOUT a similar clause) offer arrives. The seller or listing agent will need to keep track of each new offer received and how each one compares against yours.

 

For example, you originally bid $320,000 with an escalation clause of $1,500 up to $360,000. So, with each new offer that arrives, no matter how good, the seller needs to always keep your bid in the back of their mind for comparison.

 

Sometimes, this effort can be confusing or frustrating to those selling the home (especially if they don’t often deal with the escalation strategy) so they might choose to forego your offer altogether in favor of more traditional ones.

 

Should You Use an Escalation Clause?

 

How do you know if including an escalation clause is right for you? First things first, discuss it with your Realtor. They’re an expert in your local market and will have an idea about the right steps to take. When talking to your Realtor, make sure you consider the following questions:

 

Will there definitely be multiple offers?

 

You should only use an escalation clause to protect yourself against the hassle of a bidding war. If there will be no other competitive offers, there is no point in including one.

 

Will the seller accept an Escalation Clause?

 

Sometimes a seller prefers each buyer to simply state outright the maximum they are willing to pay on the first go around, rather than deal with escalating offers. Make sure you know what your seller prefers before putting together your offer.

 

Need someone to walk you through the escalation process? Work with one of our top local agents! With great reviews and a flat rate price, you’ll wonder why you didn’t go with Clever earlier. Call us today at   1-833-2-CLEVER or fill out our online form to get started.

 

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