In a competitive market, buyers often do anything to help their offer stand out in inevitable bidding wars. One tactic is to add an escalation clause to a request. This tactic will position the buyer’s offer above other offers. If you’re curious if an escalation clause is right for you, read on for everything you need to know about escalation clauses.
What is an escalation clause?
An escalation clause will automatically raise the offer price to outbid competing offers. An offer with an escalation clause will outbid the highest offer, typically up to a set amount. However, some escalation clauses don’t have a maximum bid. This can result in an offer with no cap. For an escalation clause to go into effect, the seller needs to prove that there is another offer.
When to use an escalation clause
Escalation clauses are typically reserved for instances where the market is highly competitive and multiple offers are expected on a property. However, they should be reserved for unique situations when it’s a home the buyer truly falls in love with.
Home buying during a competitive market can be frustrating, but it’s wise for buyers to resist adding an escalation clause unless. An escalation clause can put the asking price above the home’s value, which can cause the buyer to lose money long-term and to potentially run into issues during the appraisal. Escalation clauses should be reserved for a home the buyer loves and can’t imagine walking away from.
Advantages and disadvantages of escalation clauses
As with any tactic, there are pros and cons of using an escalation clause when buying a home. Below are some of the pros and cons of using an escalation clause as a buyer.
Pros of an escalation clause
- Escalation clauses can give buyers confidence in their offer, especially in a competitive market.
- The offer can stand out to sellers and communicate a buyer’s interest
- An escalation clause can protect a buyer from overpaying, as the offer is only activated when a competing offer comes in.
Cons of an escalation clause
- The buyer loses the opportunity to negotiate with the seller since the clause states the maximum amount a buyer will pay.
- An escalation clause may cause an issue with the appraisal value if the offer exceeds the appraisal value. This may result in the lender not giving the buyer the funds for the home, or the buyer may need to pay for the difference in cash.
- An escalation clause doesn’t guarantee that the buyer will get the home. The seller may choose a more appealing buyer, such as an all-cash buyer, over a buyer who needs financing and extends an escalation clause.
