Have you been trying to buy a home for months without any luck? Do you find yourself constantly losing out to other buyers? Have you made several offers on houses? Over the last several years, potential buyers have faced an extremely challenging environment.
Few houses and high demand lead to a significant percentage of bidding wars. Isn’t there something a buyer can do to increase their chances of winning? There sure is, and it is called an escalation clause!
We will examine an escalation clause and why you should consider using one when buying a home.
What is an escalation clause in real estate?
An escalation clause can be a beneficial tool for homebuyers in a competitive real estate market. This clause allows potential buyers to express their willingness to pay more than the listed price for a property.
It is particularly useful when multiple offers are presented to the seller, giving buyers an edge in securing the desired property. Let’s look more closely at an example.
Example language to use in a purchase agreement
If the seller receives a bona fide offer from another buyer higher than the Buyer’s initial offer. In that case, the Buyer agrees to increase their offer by $5000 above the highest competing offer, up to a maximum purchase price of $500,000.
Understanding how to write an escalation clause is crucial for buyer’s agents. Maximum Real Estate Exposure has some excellent tips on preparing a winning clause. Take the time to read through the advice to increase your chances of winning.
From many years of experience as a listing agent, many buyer’s agents and their buyers make the mistake of making their “escalator” too low. The escalator should be at least $5000 to motivate a seller and make the offer attractive. I consistently see agents making a $1000 escalator which is far too low to influence the seller’s decision.
$1000 doesn’t motivate a seller to choose an offer when other contract terms could have meaningful importance.
Let’s say the property was listed at $485,000, and there were three other competing offers of $485,000, $490,000, and $495,000. The buyer also decided to offer $485,000, including the escalation agreement.
In this case, the escalation clause would trump all the offers on price. The buyer’s offer would be escalated to their maximum purchase price of $500,000.
The buyer would win with all other things being equal regarding contingencies and contract terms.
Reasons to use an escalation clause when writing an offer
Here are a few reasons why an escalation clause could be a good idea when buying a home.
Makes an offer more competitive
An escalation clause helps buyers stay competitive in a seller’s market. Multiple buyers often compete for the same property in a market with low inventory and high demand. When buying a house, you want every edge you can get.
Buyers can increase their bid incrementally above other offers up to a specified limit by including an escalation clause in their offer. This ensures that the buyer remains competitive and has a better chance of securing the property even if other offers are higher initially.
Saves time and effort
Second, an escalation clause can save buyers time and effort. In a competitive market, buyers may find themselves in a bidding war, constantly increasing their offer to outbid others.
With the clause, buyers can set a maximum limit for their offer, eliminating the need for constant back-and-forth negotiations. This saves time and energy for both buyers and sellers, streamlining the process and potentially making the offer more attractive to the seller.
Shows the seller you’re serious
Additionally, an escalation clause allows buyers to demonstrate their commitment and seriousness to the seller. By including such a clause, buyers show they will go the extra mile to secure the property. This can be particularly appealing to sellers who may prioritize a smooth and efficient transaction over the highest offer.
Including a real estate escalation clause can make the buyer’s offer more enticing and increase their chances of being selected.
Weigh any risks and listen to your real estate agent
However, it is essential to note that while an escalation clause can be advantageous, buyers should exercise caution and consult with their agent or real estate attorney before including one in their offer.
A clear understanding of an escalation clause’s terms and potential risks. It is also essential to consider other factors, such as the buyer’s financial situation and the specific market conditions, before deciding whether to include this clause.
Unfortunately, some real estate agents don’t understand them and tell their seller clients not to accept them. While this may be a complete disservice to their client, it is how things work. Not every real estate agent is a professional.
Final thoughts
In conclusion, an escalation clause can be valuable for homebuyers in a competitive real estate market. It helps buyers stay competitive, saves time and effort, and demonstrates commitment to the seller.
However, buyers should approach an escalation clause carefully, seeking advice from professionals in the industry to ensure they make informed decisions.
