What is an Escalation Clause in Real Estate?
You are found a home you love. You know that there are multiple buyers who are also interested in the home and have made offers or are likely to make offers very soon. You really want this home but you don’t want to go “hog wild” and over pay. This may be a time to use an escalation clause.
What is an Escalation Clause?
An escalation clause is a provision in a contract that allows the buyer to increase their offer if the seller accepts another offer. The second buyer can then outbid the first one and still have time to evaluate their decision before officially submitting an offer. Escalation clauses allow buyers who are serious about buying a property but are concerned about losing it, or those who don’t want to pay too much for something, to keep competing with other buyers until they get what they want (while still giving themselves some wiggle room).
Here is an example of the contract language I use when I have a buyer who wants to use an escalation clause:
Contract Price to be [insert number, e.g. $500.00] higher than the highest bona fide offer, net of concessions, received by Seller, not to exceed [insert cap number, e.g. $5,000.00].
The parties intend this agreement to be a binding contract and not an offer to enter into a contract at a later date. The price determination will take place as set forth herein, but the fact that the price is not determined as of the time this contract is fully executed by both parties shall not defeat the existence of a contract.
Listing Firm to provide Selling Firm with a copy of the next highest bonafide purchase agreement offer.
It’s important to have that last sentence in the purchase agreement to ensure that there really are competing offers and that those competing offers are what “escalated” your purchase price.
Conclusion
Escalation clauses are a great tool for buyers who want to ensure they get the property that they want with some protection against going “hog wild” and grossly over paying. The best way to avoid any issues with escalation clauses is to make sure you have a good working knowledge of them before you use one. If you have questions about how they work or if they’re right for your situation, contact me today. Go here for my contact info!
To read more about how to Win at Real Estate when buying a home, check out these Blog Posts:
Buyers Beware: Avoid Big Mistakes When Buying a Home
