The Rewards of Remodeling a Fixer-Upper

« Back to Home

Two Things You Should Consider Before Adding An Escalation Clause To Your Offer

Posted on

When you're shopping in a hot market, it can be tough to beat out the competition to get the home you want. One tool some real estate agents recommend is adding an escalation clause to your offer on a home. Here's more information about this option and two things you should consider before adding this clause to your next bid.

What is an Escalation Clause?

An escalation clause is essentially an automated way to outbid other people submitting offers on a house. You define the amount of money you're willing to pay over the top amount as well as a max amount you're willing to pay for the home.

For instance, you could set up your escalation clause so you pay a $1,000 more than the highest offer and a maximum of $350,000 for the house. If someone bids $315,000 for the home, your escalation clause would automatically increase your offer to $316,000. However, if someone bids $360,000, your offer would max out at $350,000.

Escalation clauses can increase your chances of having the top offer in a competitive market, which can help you secure the home of your dreams. However, there are two things you need to consider before employing this option.

Not All Sellers Accept Them

While an escalation clause can be a buyer's best friend, it's not always in the seller's best interest to accept an offer with one. The seller can't negotiate the price of the home via submitting counteroffers to interested parties when one of them has an escalation clause. Additionally, the top offer may be the maximum amount the seller can hope to get in that transaction. If you were willing to pay $350,000 but the seller took your offer of $316,000, that's a $34,000 loss for them, even though they probably wouldn't know it unless you told them.

Because of these issues, the seller may be unwilling to accept your offer with the clause attached, which could kill your chances of getting the home right out of the gate.

The Seller May Raise the Price

The biggest danger of using an escalation clause, however, is it might trigger a greed reflex in the seller. If the seller sees that someone is willing to pay more than he or she was anticipating, the person may reject all the offers and raise the price in an attempt to get more money. In that case, you may want to reconsider whether you really want to do business with that seller.

Escalation clauses can help you win a bidding war, but you need to be careful about using one. Discuss the issue with a real estate agent to determine if this is the best strategy for your situation.  


Share