When purchasing a home you have a few options of how you present your offer, and what you include in your purchasing contract. An escalation clause is one of those options. An escalation clause adds some flexibility to your offer that can prove to be very useful. Be cautious though, and consult with your real estate agent and your lawyer if you are considering including one. If your situation does not require you to use one, it may not be the best option for you.
What is an Escalation Clause?
An escalation clause is language inserted into a real estate contract that is relatively pretty simple to understand. Essentially an escalation clause allows a buyer to say that they are willing to pay price X, but if a higher offer comes along they are willing to increase their offer to price Y. The purpose of the clause is to ensure that you are still in the running to purchase the house even if someone makes a higher offer than your original offer.
How Does an Escalation Clause Work?
While each escalation clause can be written differently, it is standard to have three basic components.
- The original offer to purchase the house.
- In what increments, or how much will the price be increased above a competitive bid.
- Where is the cap, or highest price you are willing to pay for the house?
For example, you make an offer of $250,000 on a house. This would be documented as your original offer to purchase the home. Your real estate agent then adds an escalation clause into your purchasing contract. It states that you are willing to increase your offer in increments of $2,000 over any competitive bid, up until your cap of $265,000. Therefore, if another buyer makes an offer of $255,000, then your bid would automatically increase to $257,000. But if a competitive buyer offers $266,000, then your bid would not increase due to your cap being exceeded. The competitive buyer would then have the highest bid on the house.
Can an Escalation Clause Always Be Used?
An escalation clause can be very useful in some situations, but in many it is not entirely necessary or accepted. This can be due to a variety of different factors. Evaluate your specific situation and determine if an inserting this clause would benefit you.
Seller Must Accept Escalation Clause
Many sellers outright state that they will not accept an offer with an escalation clause. They would prefer their interested buyers to submit the highest offer they are willing to pay from the start. This motivates buyers to put forth their highest offer immediately. This method also greatly streamlines the paperwork and decision making process. Due to the fact there is no contingency to refer back to every time an offer is made.
Sellers are not the only ones that could potentially lose money when an escalation clause is in place though. When you insert this clause into your contract you are outright saying how high of an offer you are willing to make on a house. This can then be used against you later in the process of buying the house, if no one submits a competing offer. If a competing offer is not submitted, the agent of the seller will advise them to ask for the highest offer you were willing to make outlined in the escalation clause.
While you do not have to agree to this higher price, you most likely will if you want to own the house. Therefore you should only include an escalation clause if you are confident that competing offers will be submitted on the house. As well as being prepared for the highest offer, or purchasing price of the home to escalate anyway.
Knowing All Of Your Options
As you have noticed by now, knowing when to use an escalation clause to your advantage can become tricky. But consulting with the professionals helping you to buy the house should always be your go-to. They will be able to clearly break down all your options and help you to determine if an escalation clause would benefit you.