Escalation Clause: A Buyer Tool That May Be Valuable In Today's Housing Market

     As I mentioned in my previous post "Looking For A Home? What To Know & What To Expect" I explained the state of the housing market right now and what you should be expecting as a buyer looking to purchase a new home. Today's housing market is faced paced and if you hesitate at all you may lose the home you are hoping to close on. The "Escalation Clause" may be a useful tool in this type of market, but be careful when utilizing it because it may add more complication then necessary.
     What is an escalation clause? Well, it is quite a simple concept actually and may be the difference between obtaining or losing your dream home when you are in competition with another offer. An escalation clause (Also referred to as "escalator" clause) allows the buyer to submit an initial offer price (x), and if the seller receives an offer higher than that price, the buyer is willing to raise their offer to (y). The three main factors of an escalation clause include the original offer price, the amount that price will be escalated above another competitive offer, and the maximum amount the offer price can reach. 
     Here is an example of what an actual escalation clause would look like: Mr. Buyer submits an offer on a home for $400,000. Mr. Buyer's real estate agent adds an escalation clause that, in the case of a higher competing offer, will raise Mr. Buyer's offer in increments of $1,000 above the competing offer. Mr. Buyer's escalation clause has been set to only be able to reach a maximum of $415,000. So, if a competing offer comes in at $405,000, Mr. Buyer's offer will automatically go to $406,000 due to the escalation clause. If a third offer comes in at $410,000, then Mr. Buyer's offer will increase to $411,000. The amount will not be allowed to exceed $415,000, therefore if one of the two competing offers is raised to $416,000, Mr. Buyer will no longer be in contention for the home. Also, if no competing offers are submitted on the home, Mr. Buyer's original offer at $400,000 will stand.
     Although the concept is simple, using it in a real life situation may be more difficult than you think. Not all sellers will be comfortable with an escalation clause contract because it diminishes the possibility of a true bidding war. It also can be a risky move for the buyer because you are literally putting all your cards on the table and showing your hand. If a buyer is to offer a contract with an escalation clause and no other competing offers come in, the seller's agent will know exactly what the buyer is able and willing to spend on the home and the buyer loses all negotiation power. Therefore, the buyer NEEDS to be very confident that multiple offers will arise on the property in question.
     Every single situation is unique, please consult your real estate agent before deciding to use an escalation clause.