What is an escalation clause?

Dated: April 23 2018

Views: 102

The real estate market can be similar to the stock market. Just like the stock market, it is cyclical. During the spring and fall, the market heats up; then in summer and winter, it slows down. Just like any stock the prices rise and fall as the market can bear them. In the case of homes that have multiple offers, any advantage you can get is helpful. As a buyer, it’s hard to stand out, but there are a few things you can do. One of those things is called an escalation clause.

What is an escalation clause?

You should use an escalation clause in a multiple offer situation. It is a way for a buyer to set their price to go above any other offers automatically. The buyer and agent will set it up that a pre-set amount will beat any offer. The buyer will set up a cap that they will not go over in this situation.

You should use an escalation clause when the price looks like it will go over the list price. An agent will give a buyer this option if they want the house. It can be especially useful if the price is below the buyer’s maximum budget.

What are some disadvantages of an escalation clause?

Even though the other buyers won’t see the offer, the seller will. The clause shows the seller what your maximum offer is and can keep them from even accepting this clause. The seller can take this information and counter with your maximum offer and not accept the clause.

Also, the escalation clause is also a disadvantage to the seller. By accepting an offer with an escalation clause, a seller takes the other offers off the table and don’t know how much they would have countered with. A bad offer could cause the seller to lose money they may have received from other offers.

What are some advantages of an escalation clause?

For the buyer, it helps keep your offer on the top of the competition and assures that you will come out on top as long as other buyers don’t go over your cap. It also gives you a better chance of getting a price closer to the next best offer than if you did it blindly.

If you use an escalation clause, the seller then has to present the complete competitive offer so you know it was necessary and not just used to cause an artificial price increase.

Make sure you know all the facts and risks before you go into an escalation clause. Also, make sure you will be happy living in the property and are good with the price before going into the bidding process. If you do so, an escalation clause can be just the right move for you.

 https://www.thebalance.com/should-you-use-an-escalation-clause-1798833

https://www.linkedin.com/pulse/escalation-clause-good-bad-ugly-david-dejulio

 

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