What Is An Escalation Clause

Dated: 01/22/2018

Views: 118

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How does an Escalation Clause work in a hot real estate market?  It's not uncommon for a seller to get multiple offers for a home.  As a buyer, the situation can become frustrating as you make offers – only to lose to other buyers that go higher and having to repeatedly find another house to bid on. Over the years a type of language inserted into an offer known as an escalation clause has become popular to address such situations. Understanding what an escalation clause is, and how they work, is important for both buyers and sellers in today’s market.


Here's how it looks...

“Buyer offers to pay $____ for the home, but if the seller receives a bona fide offer that is higher, buyer will increase the price to $____ above the amount of the other offer.”


In other words a seller can’t “make up” an imaginary offer, they must have a real offer that is higher than yours and they must prove it by actually giving you a copy of that competing offer.

An escalation clause states that you are willing to outbid any other offers on the home by a certain amount, up to a ceiling price. The ceiling is also referred to as a “cap price” or the most you are willing to pay.


Example:

You may offer $300,000 on a home with an escalation clause stating that you will outbid other offers by $5,000 up to $321,000. So if another buyer makes an offer of $305,000, your escalation clause means that you will pay $310,000 for the home. If a buyer offers $325,000, then according to your escalation clause you are out of the bidding, because the offers have gone over your $321,000 ceiling or cap.


Pros:

Peace of Mind for the Buyer

Buyer Doesn't Pay Too Much


Cons:

The Listing Agent May Not Understand Escalation Clauses

You Give Away Your Bargaining Position

The Confusion Created By Multiple Offers

You Might Frustrate The Seller

The Appraisal


Now it's important to note that an escalation clause only deals with the price..."how much you are willing to pay".  However there are many other factors that are just as appealing to a seller such as Inspections, Appraisal, Closing Fees, Closing Date, Post Closing Date just to name a few.  So the escalation clause can certainly be used to make your overall offer to purchase more appealing but it is not the only factor that the seller will evaluate when ultimately picking the best offer for them.


*Once you make an escalation clause a part of your contact, both you and your REALTOR better know what they mean, because it is binding.  Should also consult with a real estate attorney for a further explanation.


Amy L Jackson
 | REALTOR® ABR, CDPE, MRP, PMN - serving Castle RockParkerDenverHighlands RanchLittletonAuroraArvadaWestminster. Let my experience as a real estate professional and investor guide you through a smooth and enjoyable transaction.  I stay on top of market trends and technology so that I can provide my clients with the highest level of service, skills, security and integrity.  Contact me at 720-231-4118 or Amy@EXITRealtyDTC.com.


To request a FREE copy of one of my 6 books visit: www.AmyLJacksonAuthor.com


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Amy Jackson

My name is Amy Jackson, I was born in Denver and have lived my entire life here in Colorado. Whether you like outdoor recreation, cultural activities, concerts or watching professional sports, there....

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