What's an escalation/escalator clause?
The home buyer makes an offer that basically says, “I will pay X dollars for this house, but I’m willing to increase my offer to Y price, if the seller receives another offer that’s higher than mine."
There’s a great variance in escalation clauses.
Real life example:
The Smith family finds a desirable home they love listed at $475,000. Due to the current market, we know there will be multiple offers. The Smiths decide they are willing to pay a maximum of $500,000 for this home. Their real estate agent submits an offer for $475,000, with an escalation clause of $2,000 above competing offers, up to $500,000, and 24 hours to respond. Another legitimate offer is submitted for $480,000, which automatically bumps up the Smith’s offer to $482,000. Another offer is submitted for $485,00, which automatically bumps the Smith’s offer up to $487,000. The Smith family ended up winning the bidding war and the home for $487,000.
Why use an escalation clause?
If there’s been a lot of interest in the property and multiple offers are expected, an escalation clause can be a great weapon in the bidding war. It keeps your offer relevant, even if competing offers outbid you. It also tells the seller than you are serious about the property and exactly how far you’re willing to go to get it.
An escalation clause has to be written just right so your offer isn’t being increased by illegitimate offers. The precise language matters. You also have to be careful that the offer doesn’t exceed the appraisal OR you have the cash to cover the difference. There’s so many more details to take into account, so it’s important to work with an experienced real estate agent like me.
More and more….
You can expect to see the use of escalation clauses increasing due to the current market situation. If your agent doesn’t have a firm understanding of an escalation clause, it’s a good idea to seek out an agent who does. It’s important for both buyers and sellers to have a thorough understanding, in order to secure the best deal for their clients.