In a seller’s market, several buyers may make offers on the same property. If you’re trying to buy a home under those circumstances, you may worry that another buyer will make a bid that’s higher than yours and that you’ll miss out on your dream house. An escalation clause may be helpful, but it’s not right for all buyers and situations.
What Is an Escalation Clause?
An escalation clause, or an escalator, is a section in a purchase contract that states that the buyer is willing to offer a higher amount if the seller receives a better offer from another buyer. For example, if you make an initial bid of $250,000, you can include an escalation clause stating that you’re willing to raise your offer by $5,000 if the seller gets a higher bid from another buyer. The clause will state the maximum amount you’re willing to pay. An escalation clause will only go into effect if the seller receives a legitimate higher offer from another buyer.
When Should You Include an Escalation Clause?
In a competitive real estate market, an escalation clause can help you stand out and show a seller that you’re serious about purchasing the property. If multiple buyers make offers, an escalation clause can reduce the amount of time that real estate agents need to spend going back and forth discussing offers and counteroffers.
Including an escalation clause can help you stick to your budget. In bidding wars, buyers sometimes get carried away and wind up spending more than they intended to. Since an escalation clause includes a cap, you’ll be able to figure out the maximum you’re comfortable paying ahead of time and avoid the urge to make a higher bid that you may regret later.
Why Might an Escalation Clause Not Be a Good Idea?
An escalation clause may not make sense if it’s unlikely that the property will get multiple offers. Even if the seller does receive other bids, an escalator won’t guarantee that you’ll get the house. For some sellers, factors such as contingencies and when prospective buyers can close are more important than price. Including an escalation clause that clearly spells out your final offer may prevent you from negotiating on factors other than price that the seller deems more important.
An escalation clause may help you win a bidding war, but you may offer more than the house is worth, then find out that you can’t get enough financing. If the house’s appraised value is less than the price you and the seller agree on, you’ll have to renegotiate the sale price, make a larger down payment or simply walk away.
Talk to Your Real Estate Agent
Including an escalation clause in a purchase contract can be helpful in some situations, but not all. Every real estate transaction is different, which is why you should discuss this and other issues with your agent and get personalized advice.
