What is an escalation clause in real estate?
If you really want a particular home and want to make an offer, but don’t want to overpay, an escalation clause in real estate can be a good way to make sure you win a bidding war but don’t overshoot the value of the home.
What is an escalation clause?
An escalation clause is when you put language in your offer that increases your bid, usually in steps, if the seller receives higher offers. For example, if you want to make an offer for $400,000, but can actually spend up to $425,000, you could put an escalation clause where your offer increases by $1,000 increments when the seller receives offers higher than yours. In your escalation clause, you would say the highest number you will offer. If someone offers more than that, then you would lose the bid.
The language in an escalation clause would include the offer on the property, how much over another offer you are willing to pay, and the highest number you are willing to offer.
Do all sellers accept escalation clauses?
No. Many sellers will not accept an escalation clause as part of an offer as they would prefer that the potential buyer makes the highest offer possible up front. The appetite for a seller to accept an escalation clause depends on the strength of a market. The hotter the market, the less likely a seller is to accept an escalation clause. Also, just because a buyer makes an offer with an escalation clause doesn’t mean the seller needs to necessarily accept it.
What are the drawbacks of escalation clauses for buyers?
An escalation clause takes a lot of the mystery out of the negotiation. The seller already knows that a buyer is willing to pay more, potentially. Therefore, the seller can reject the first offer of the buyer with a certain amount of confidence that the buyer will come up.
When should an escalation clause be used by a buyer?
It’s a handy tool to use if you are certain that there will be more higher offers than yours. It’s like you submitted an offer, but then hedged it to increase your offer automatically. If there are multiple offers, your offer automatically increases to keep pace. If there aren’t multiple offers, though, you will have revealed more than is necessary for a negotiation.
Who should write the escalation clause?
It’s important that you have a real estate attorney write the offer and escalation clause. Some people make the mistake of doing it themselves or having the buyer’s real estate agent do it. But, whenever you are talking about numbers and offers, you don’t want to make a mistake. Having an attorney do it is worth the money.