What Is An Escalation Clause?
How To Write an Escalation Clause
Real Estate Escalation Clause Example
When To Use a Real Estate Escalation Clause
Is an Escalation Clause a Good Idea?
Real Estate Escalation Clause Tips
Escalation Clause Bottom Line
A real estate escalation clause (also known as an escalator clause) is a provision contained within a contract that allows prospective buyers to increase, or escalate, an existing offer. Escalation clauses will typically state that a buyer's offer will increase upon the submission of a higher offer by a different buyer.
Escalation clauses indicate the seriousness of an offer, usually stating how much a buyer is willing to bid in order to purchase the property. They essentially allow you to offer slightly more than any other submission after your initial offer.
Escalation clauses are usually written into the underwriting offers, and they are a great tool for buyers in competitive markets. If you are worried about another buyer making a higher offer on the home, an escalation clause is a great way to ensure you can still purchase the property.
- Start With the Initial Purchase Price Offer
- Write Deails on Escalation Increments
- Include Your Maximum Purchase Price
1. Start With the Initial Purchase Price Offer
A real estate escalation clause should always start off with the initial offer. You'll include the purchase price as well as any other terms and contingencies that are part of the offer. For example, if you want to offer $500,000 for the home, that would be your initial offer in the escalation clause.
2. Write Details on Escalation Increments
Another key element of an escalation clause is the increments by which the offer will escalate. For example, your offer might escalate by $10,000 or $25,000, or $50,000. The escalator amount is up to you and usually depends on the price of the home. You'll also need to determine how the escalator is triggered. To prevent the seller from pretending they've received a higher offer, you should require proof of any other offers that exceed yours.
3. Include Your Maximum Purchase Price
Finally, your escalation clause will need to include your maximum purchase price. If you're financing the home, you'll want to consider how much your lender has pre-approved you for. For example, if you are willing to pay up to $550,000 for the home, your escalation clause would state that is your maximum purchase price.
So, for example, say you find your ideal home and put an offer in for $300,000; an escalation clause that was written into the contract allows you to beat any subsequent offer larger than yours in increments of $5000, up to $320,000. If no other offers are submitted on the home, your original offer stands at $300,000. However, in this scenario, Buyer John then puts an offer in for $305,000. Thankfully, because of your escalation clause, you can now beat his offer according to the terms of your contract, bringing your new bid to $310,000. In this case, if the bidding stops there, you would have the best offer on the home.
Let’s now escalate the circumstances. If Bill puts in an offer for $325,000, you’re unfortunately out of luck, as your escalation clause only determines you can bid up to your specified maximum amount of $320,000. So here, since your escalation clause has been exceeded, Bill would have the top offer, and you would lose the bid on the house.
Escalation clauses are typically used when a home or property is of great interest to an individual buyer or highly sought after in the market. If there are a lot of different people vying to purchase the same property, it might be a good idea to include an escalation clause in your contract to increase your chances of procuring the sale. As a buyer, it can also be extremely valuable to indicate how committed you are to a deal.
Using an escalation clause is a good idea if you really want to get a property. It will help you win a potential bidding war and also shows the seller how serious you are about buying the property.
But while it may seem like a good idea to always include escalation clauses “just in case,” there are times when it can be a disadvantage. It’s only advisable to include an escalation clause if the buyer or their real estate agent is confident that there will be multiple competitive offers on a house because its inclusion downplays the power of any negotiations. This makes perfect sense, as an escalation clause indicates to the seller just how much the property is desired and how much a buyer is willing to pay for it.
If no additional offers are made on a home, but an escalation clause has been included in the contract, the original offer still stands. However, the seller may counter-offer, as the escalation clause has made them aware that the buyer is in a position where they are willing to pay a higher amount to purchase the home.
It should also be noted that it is entirely up to the seller whether or not they will accept an escalator clause. In some cases, sellers prefer that buyers simply put in original offers for what they’re willing to pay for the property. Sellers may also not want to deal with the confusion and increased time it takes to process multiple offers. But generally speaking, under the right circumstances, escalation clauses work highly in a seller’s favor, as they almost always guarantee they will secure the highest possible purchase price for their home.
Buyers who submit escalation clauses are making an unequivocal statement as to the maximum they are willing to offer on a home. Say your initial bid is $410,000, but you put in an escalation clause that allows you to counter-bid up to $430,000. If no other bids are put in on the home, your initial offer stands. However, you have made it clear through the clause to the seller that you have the means and are willing to pay $20,000 more than your offer to buy the home. This leaves the door open for the seller to counter-offer, knowing that you are capable of paying a higher price. Consequently, if you then choose not to accept the counteroffer, it could cause you to lose the home, as the seller may then decide to leave the house on the market in the hopes of obtaining a new, better bid. This is the main reason why it’s not a good idea to automatically include an escalation clause in your offer unless you are sure it will be necessary.
If you’re interested in purchasing a highly desired property, an escalation clause can be a great way to provide yourself with some security. However, buyer beware. Don’t push the escalation higher than you’re willing to pay. It can be tempting to become trapped in a bidding war to win a property, especially where escalation clauses are involved. Still, it’s of the utmost importance that buyers don’t set the upper limit of their clause higher than they can afford to go.