In a seller’s market certain homes may get multiple offers. To demonstrate willingness to go higher with the price an escalation clause may be needed. An escalation clause in a real estate contract is a provision that allows for an increase to the buyer’s offer price. It is activated only if a competing offer is submitted that is higher than the buyer’s original offer. Here are some examples of how an escalation clause might be used in a real estate contract:
Example 1: Buyer is willing to pay a specified amount over the highest offer to a maximum specified purchase price, but only if the seller receives another offer at the same time which is higher and provides proof of the higher offer.
Example 2: A buyer makes a bid to buy a house for $300,000, with an escalation clause requiring a $5000 incremental increase to beat rival offers, up to a limit of $315,000.
Example 3: The initial offer is $300,000 with a $2,000 escalation clause and a maximum cap of $320,000. If another buyer offers $305,000, the escalation clause automatically bumps the offer to $307,000 (original offer + escalation increment).
Be aware that an escalation clause in a real estate contract can have both advantages and disadvantages. Here are some of them:
Pros:
- Competitive Advantage: An escalation clause can offer buyers a competitive edge in multiple-offer situations.
- Simplifies Negotiations: It can simplify the negotiation process.
- Cost Saving: It can potentially save costs.
- Shows Seriousness: An escalation clause indicates that a buyer is serious about the house. Only Pay What You Need: You only pay as much as necessary to get the house.
Cons:
- Introduces Uncertainty: An escalation clause can introduce uncertainty into the transaction.
- Appraisal Challenges: It can result in appraisal challenges, where the appraised value comes in lower than the escalated offer price.
- Viewed Skeptically by Sellers: Some sellers may view escalation clauses skeptically.
- Risk of Overpaying: There’s a risk of overpaying for the property if the buyer’s maximum price is significantly higher than the list price.
The decision to use an escalation clause depends on various factors, including the current market conditions, your budget, and your risk tolerance. It’s important to note that while escalation clauses can be advantageous in a competitive market, they also have potential disadvantages. Some sellers may not accept offers with an escalation clause, and some brokerages may not be well-versed in how they work. Therefore, it’s always a good idea for buyers to seek professional legal advice when considering the use of an escalation clause
*The information provided here is for educational purposes only. Consult professionals before making any financial or real estate decisions.
