What to Know About Escalation Clauses

It’s been tough out there for buyers for the past couple of years. Being outbid time and again on a home has become part of the process for many buyers. But one tactic you can use to make sure your offer stands out is an escalation clause. An escalation clause is a contractual provision that allows a buyer to automatically increase their offer on a property up to a specified limit in response to competing offers. Essentially, this clause can help you stay competitive in a hot real estate market by offering a way to outbid other potential buyers.

How an escalation clause works

Let’s say you want to make an offer on a house listed for $500,000. You might include an escalation clause in your offer that says you’ll automatically increase your bid by, say, $5,000 over any competing offer up to a maximum of $525,000. So if another buyer makes an offer of $510,000, your offer would automatically increase to $515,000. If the other buyer counters with $520,000, your offer would increase again to $525,000, which is your maximum.

Reasons to use an escalation clause

There are several reasons why a buyer might choose to include an escalation clause in their offer. For one, it can help them stay competitive in a seller’s market where there are multiple offers on desirable properties. By offering to automatically increase their bid, buyers can signal to the seller that they’re serious and willing to pay more than other potential buyers. Another reason to use an escalation clause is to streamline the negotiation process. Rather than going back and forth with counteroffers, an escalation clause allows buyers to set a clear limit on what they’re willing to pay and avoid the uncertainty and stress of a bidding war.

What to consider before adding an escalation clause

That being said, escalation clauses aren’t always the best choice in every situation. Here are a few factors to consider before including an escalation clause in your offer:

• The seller’s motivation: If the seller is highly motivated to sell quickly, they might prefer a lower offer with fewer contingencies over a higher offer with an escalation clause.
• The local market: Escalation clauses are more common in hot real estate markets where demand outstrips supply.
• The buyer’s financial situation: Before including an escalation clause in your offer, make sure you can afford to pay the maximum amount specified.
• The property’s value: An escalation clause might not make sense for a property that’s already priced at the top of its market value.

What to consider when drafting an escalation clause

If you do decide to include an escalation clause in your offer, make sure to consult with a real estate agent or attorney who can help you draft the clause and ensure that it’s legally binding. Some things to consider when drafting an escalation clause include:

• The maximum price: Be sure to specify the maximum price you’re willing to pay and include a provision that states that you won’t exceed this amount under any circumstances.
• The increment: Decide on the amount by which your offer will increase over competing bids. This could be a fixed amount (e.g., $5,000) or a percentage of the competing offer (e.g., 2%).
• The documentation: Specify what documentation is required to prove the existence of competing bids. This could include a copy of the competing offer or a signed statement from the seller’s agent.
• The timeframe: Set a timeframe for when the escalation clause will expire (e.g., 24 hours after the competing offer is received). This will prevent the seller from waiting too long to respond and potentially leaving you in limbo.

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