Buying a Home? What’s an Escalation Clause?

With housing inventory low and the market so competitive, many Buyers are seeing multiple competing offers when they find a home they like. How can you stand out amongst the competition without overpaying? The escalation clause is the tool you can use to keep you in the game. But many don’t understand how they work and what they mean when you make an offer. Every offer includes important terms beyond just price — contingencies, proposed closing dates, deposits and more. Winning on price is important, but you don’t want to overpay either.

Here are some things to keep in mind when preparing an offer with an escalation clause:

• Your offer has a base price and ONLY escalates if a higher offer is on the table: If there are multiple offers on the table and you decide to submit an escalation clause, you will include an offer price that would only escalate if there is another higher  “bona fide offer”. Meaning that the Seller has to show you the other offer as proof that your base offer has been beaten and that you are being escalated on price.
• Your escalation clause is capped at the max price you are willing to go up to: So you are willing to beat other legitimate offers up to a certain point, but not above… That top number is referred to as the Cap. You indicate that you are willing to go up to, but no higher than, a certain number. That way you only pay up to your pre-determined cap if you need to in order to win.

• Pick a significant “escalating factor”: You are willing to beat another proven offer… but by how much? That must be spelled out. Beating another offer by $1 usually is not enough as it is not a competition where the highest price automatically wins. There are other factors in the offer that the Sellers consider as well. If your other terms are not as strong, you may need to handily beat other offers on price to make up for a delayed closing or multiple different contingencies that you want the Sellers to accept.
• Don’t worry, escalation clauses are not binding: They are simply a statement of your intent. Even if you include one and the Seller wants to move forward with your escalated offer, they have to counter offer you directly with the terms you indicated you’d accept along with the proof of the other offer so you can confirm it is genuine and that you want to move forward at the escalated price.

Want to learn more about ways to help your offer stand about amongst the competition? GreenLine Real Estate’s Buyer’s Agents are the best in the business and can help you better understand the market dynamics where you want to live. Click here for more Home Buyer resources.