October 21st, 2019 10:12 AM by Jackie A. Graves, President
What is an escalation clause? When you're deciding on what price to offer on a home, the situation may call for
a single price or, in some cases, an escalation clause.
What is an escalation clause?
escalation clause is a real estate contract, sometimes called an escalator,
that lets a home buyer say: "I will pay x price for this
home, but if the seller receives another offer that's higher than mine, I'm
willing to increase my offer to y price."
theory, an escalation clause is fairly simple. In practice, there are a lot of
details involved with this clause.
does an escalation clause work?
While escalation clauses vary significantly, the general
escalation addendum has a few basic components:
For example, buyer Brown offers $100,000 for a home or piece of
real estate. Her Realtor® adds an escalation clause that, in the case of a
higher competing offer, will increase Brown's offer in increments of $2,000
above the competing offer.
Her escalation clause goes up to a maximum of $110,000. If no
other offers are submitted, Brown's offer remains at $100,000.
If buyer Green offers the seller $103,000, then Brown's offer
would automatically escalate to $2,000 above that, bringing Brown's offer to
$105,000. If buyer Orange offers $111,000 for the home, then Brown's maximum of
$110,000 will be exceeded, and Orange will have the top offer.
the seller accept an escalation clause?
Some home and real estate sellers simply state that they will
not accept an offer with an escalation clause. They would prefer that every
buyer submits exactly what they're willing to pay for the home or real estate.
Sellers sometimes prefer this method, because it motivates
buyers to outbid one another on the first try. It also streamlines the contract
paperwork and the decision-making process.
there definitely be multiple offers?
Escalation clauses should only be used when the buyer is fairly
confident that there will be multiple offers, or when the buyer expects to pay
an increased price.
Buyers who submit an offer with an escalation clause are laying
all their cards on the table: The seller knows immediately how far the buyer
will go to secure the home. If that offer ends up being the only offer
submitted, it technically remains at its original price.
A Realtor representing the seller will know, however, to
counteroffer to the buyer at a higher, escalated price, since the buyer is
clearly willing to pay more. While there's no guarantee that the buyers will
agree to the higher price, it is likely that they will.
A buyer gives up a lot of negotiating power and potentially
leaves money on the table when using an escalation clause that goes unmet by a
the seller's agent clearly stated a one-day review or multiple rounds of
In hot real estate markets, a wide variety of offer-review
processes can be available. Some might specify, for example, that the property is
going on the market on Friday, and that all offers will be reviewed the
following Thursday. The sellers and their Realtor will make a final decision
This situation can be ideal for the escalation clause, when a
buyer knows it's an all-or-nothing offer. Other sellers take a back-and-forth
They may collect offers from buyers for one week, and then
respond to a handful of the best offers by saying "Send us your highest
and best offer."
This technique is particularly disliked by many consumers and
professionals for its lack of clarity, but it's important to know that it
exists. Before writing an offer, a buyer's Realtor can inquire to feel out the
details and make sure the buyer is prepared for the situation.
Writing an escalation clause on the initial offer in a
multistage situation could put the buyer in a weak position during the second
round. It's perfectly legal for a seller's Realtor, with the seller's
permission, to reveal to all potential buyers what the top initial offer is and
to ask everyone to beat it.
In this case, the escalation clause would reveal that buyer's
maximum, losing a competitive edge.
with careful confidence, and know that each situation is unique
If you're considering an escalation clause, your Realtor is
probably busy researching the circumstances around the seller's process of
reviewing offers. The Realtor's knowledge of normal practices and probable
outcomes in your market will make your offer much more likely to succeed.
Escalation clauses can cause a lot of stress for home buyers,
but when they're boiled down to the basics, they're fairly straightforward.
Remember to be realistic, to be comfortable with how much of a competing bid
you're willing to offer, and to confidently go after a piece of real estate at
Buyers shouldn't be tempted to escalate their purchase price
above a figure that they would be comfortable paying. At the same time, they
should realize if inventory and interest rates are low that aggressively
pursuing a good home at a good price is necessary to winning in a competitive
Potential buyers who are only looking to get a steal often end
up not being buyers at all.
Source: To view the original article
Source: To view the original article