We are experiencing one of the hottest real estate markets in recent times, if not ever. One very useful tool for buyers is to use an escalation clause in your offer. Escalation clauses have become very popular recently. Read on to see exactly what an escalation clause is and some of the pros and cons of using this tool and also, whether or not you should employee this in your next offer.
Escalation clauses can have several different variations but generally speaking they are meant to increase your offer in the event a seller receives one or more competing offers. The simplest version of an escalation clause would be written to increase your offer by a stepped amount to make it higher than the highest bona-fide offer that a seller has received. Normally you would include a maximum offer amount. For example, you make an offer of $250,000 with an escalation clause stating that you will beat the highest bona-fide offer by $1,000 up to a maximum of $265,000. Basically, if your offer is at $250,000 and the seller has received a competing offer of $257,000, your offer would automatically increase to $258,000. Simple, right?
Next, you have to ask what are the Pros and Cons of an escalation clause?
First the Pros:
Now, the Cons:
Some additional escalation clause considerations whether you are the buyer or seller:
From the seller’s point of view, what are you obligated to do with an escalation clause? Well, you could agree to accept the initial offer without triggering the escalation clause. You are free to decline the offer all together and go with a different offer, even if it is a lower sales price. You could call for a highest and best offer from all of the current offers you have received and set a deadline for those offers to be received.
Again to the Buyers, there are lots of tools in the tool chest to use when presenting your offer to purchase a home in a “seller’s market.” The escalation clause is one of many that we see being used regularly in recent transactions. We normally recommend using other tools first. These include making your highest and best offer first and including the most favorable sales terms to include short inspection periods, cash or strong financing terms, offering to pay some or all of the seller’s closing costs, and also being flexible with closing dates and timelines.
Hopefully this helps you decide whether including an escalation clause is the right tool for you to use. Give us a call and we will help you win in a hot market.