Escalation Clauses, What Are They?
Buyers in today’s real estate market know all too well just how stiff the competition has become. As a result, they are always looking for ways to stand out from other prospective buyers, and one tool that has become increasingly popular is adding an escalation clause to an offer. If you’re unfamiliar with this term, read for details!
In short, an escalation clause is a provision that is added to an offer (or counteroffer) where the buyer offers to outbid any other buyers on a property without them knowing.
Have you ever been outbid for something on eBay? Many buyers will go in and bid with the highest amount they will pay, but eBay only incrementally increases the purchase price as other buyers enter into the auction. You can do something similar in real estate with escalation clauses. Think of it this way: you put in an offer on your dream home, but someone else comes along and outbids you. An escalation clause written into your offer usually says that you will beat any additional offers the seller receives by $5,000 up to your best and final purchase price. This is the escalation clause, and they are binding.
If you think about it, this could lead to potential issues for you as the buyer because what happens if another interested buyer puts in an insanely high offer? You are bound to pay whatever the predetermined amount was in your escalation clause over the (now) current offer.
One way to help mitigate risk if you are interested in using an escalation clause is by including a provision that allows you to verify the next highest competing offer. Since your offer will be dependent on what other buyers offer, you will certainly want to make sure that any additional offers that come in are valid.
While an escalation clause might make your offer more attractive to a seller, it also shows them exactly how much you’re willing to pay. This can limit your ability to negotiate with a seller, where you might have come out with a better overall deal from being flexible with things like inspection time frames and so on.
Be prepared for your real estate agent to caution you against using an escalation clause. While they can be effective, there are also pitfalls to be aware of, as discussed above. Generally, escalation clauses would only make sense in a situation where you couldn’t stand the idea of losing the home to someone else.