When you’re house hunting, one term you may be exposed to is the escalation clause. This is a term that usually comes up during the offer phase. Simply put, when making an offer on a home, you may wish to bid a single price, or you may wish to augment your offer with an escalation clause.
But when is it necessary for buyers to use an escalation clause? And what does an escalation clause actually do? In this post, we’ll fill you in on everything you need to know about escalation clauses, specifically from the buyer’s point of view.
Defining the Term
We’ll start with a basic definition. An escalation clause is a specific type of contract, which allows the buyer to say something like this: “I’ll pay XXX amount of money on the home, unless the seller receives a higher offer, in which case I’ll pay up to XXX.”
Essentially, escalation clauses are designed to keep you from being outbid; in a really competitive market, an escalation clause can keep you in the game. But while they may sound simple in theory, they can actually invite quite a bit of complexity into your real estate transaction.
How Escalation Clauses Work
The specifics of an escalation clause can vary according to the house and circumstance in question. Generally speaking, though, it will include these core components:
- The original offer price you’re willing to pay.
- How much you wish to increase your price over any competitive bids.
- The maximum amount you’re willing to pay on a home.
So, for example, you may say that you’d like to bid $200,000 on a home; and, if another buyer puts in a higher offer, you’re willing to increase your price to $2,000 over what they bid; but, you won’t pay anything over $225,000 total. That’s a basic example of a standard escalation clause.
From the Seller’s Point of View
Now, you may find yourself wondering: What will sellers say about your escalation clause?
It’s totally up to the seller’s discretion whether they will accept an offer with an escalation clause. Some simply won’t consider them at all, preferring buyers to make a more basic offer of what they’re willing to pay on the home.
But in a hot market, sellers may sometimes prefer escalation clauses, because it encourages bidding wars.
In other words, when it comes to whether or not the seller will accept your escalation clause, it’s very seller- and market-dependent.
What if There are No Other Offers?
Generally speaking, we’d only recommend using an escalation clause if you feel fairly confident that there will be many competing offers.
That’s because, when you provide an escalation clause, you’re laying all your cards on the table; you’re signaling exactly how much you’re truly willing to pay. And if you don’t have counteroffers to contend with, you’re giving the seller an opportunity to use that information against you, essentially forcing you to pay your top amount.
What Should You Do?
When it comes to whether you should include an escalation clause in your offer, there aren’t any simple or straightforward answers. The best thing you can do is talk it over with your real estate agent, who can study the market and make an educated guess about what kind of offers the home is going to get. Your agent can then advise on whether an escalation clause can be beneficial, or simply entails unnecessary risk.
If you do decide to provide an escalation clause with your offer, put some thought into how high you’re really willing to go, and how much you’d like to “escalate” your offer over the competition.
And remember that while escalation clauses can be helpful, they can also come back to bite you, particularly if there aren’t any other offers made. Don’t use this option lightly.
More Questions About Buying or Selling a House?
We hope this has been a helpful guide to escalation clauses.
If you’re seeking additional insights into the process of buying or selling a home, don’t forget to claim your FREE seller’s report from SOLD.com. Request yours today and get individualized guidance for selling your own property.