Whether you're a buyer or a seller, it benefits both parties to know what an escalation clause is and how it works. As a seller, it can help get you more money for your property. And as a buyer, it can help you win a property in a bidding war.
What Is An Escalation Clause?
Simply put, an escalation clause is a part of an offer that allows the buyer to submit a bid for a property with the ability to increase the offer if another offer comes in higher than their original bid.
For example, let's say there is a 4-bed, 3-bath home listed for $350,000 that you, as a buyer, would like to write an offer on. You do not want to overpay for it, however, you are willing to pay up to $375,000, if necessary. With an escalation clause, you could write an offer for $350,000 with an escalation up to $375,000. Ultimately, the amount that you would end up paying for the home would depend on the following:
- Did the sellers get any other offers or did they get offers over the asking price? If there were no other offers or all the other offers were under the asking price, then you as the buyer should be talking about an accepted offer. Sometimes other factors like a cash offer, no inspections, appraisal gaps (see my blog on appraisal gaps) or time of possession will make another offer more attractive to a seller and they will accept that offer even though it is not the highest. A good buyer's agent will also discuss these other factors with you so that you can put your best foot forward when writing offers.
- How much did your escalation clause say you would pay over a competing offer? When preparing an escalation clause, the buyer determines an amount they are willing to increase over a competing offer. That amount is usually $1,000, but I have seen some for as little as $500 and as much as $2,500. If the highest competing offer was $365,000 and your escalation increase amount was $1,000, then your offer would now be $366,000. All other factors being equal, you should win that bidding war.
- Did an offer come in over your maximum price? Any offer over $375,000 would become the highest offer since your maximum price is $375,000. Knowing your maximum price and not going over it is a wise strategy, even if you are emotionally invested in winning the bid. I have had clients who know they are overpaying for a home, and they are fine with that, but for most people, it is good to remember that the purchase of real estate is a part of building long-term wealth, and bidding wars can often come back to bite you when you go to sell the property in the future. Being aware of how high comparable properties have sold in the same neighborhood helps you decide how high is too high.
Additional Escalation Clause Tips
If you are the seller, of course, you would be happy to see your property in a bidding war or hear that you a buyer want to pay more than the asking price for your home. However, keep in mind that a financed offer will usually require an appraisal, and without an appraisal gap, you may not get the agreed-upon amount, therefore, your highest price is not always your best option.
If you are the buyer, it tips your hand to the seller as to what you are willing to pay for the property. I have represented sellers who asked the buyer for a top price even though there were no other offers just because they saw that they were willing to go that high on their escalation clause. A good agent will help you evaluate the situation and determine if using an escalation clause is the right move on any given property.
Learn More About Escalation Clauses
The Amy Team of Realtors in Aurora, OH fully understands the impact that an escalation clause can have in helping to close a deal.
For more information about escalation clauses or if you want to start a conversation about buying or selling a home, please feel free to call Amy @ (330) 562-4409 or send us a message via our Contact Us page.