Escalation Clauses

Published on April 6, 2021 under First-Time Home Buyers

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You have finally found the house that you spent months looking for, only to realize that you may not get it. Right now, we are in a seller's market. Homes are on the market for days, only to have multiple offers placed on them. Many people are putting in several contracts, only to come out without a home. Because of this, many real estate and mortgage professionals are putting escalation clauses in their contracts.

What exactly is an escalation clause?

This clause, also known as an escalator, helps buyers determine how much they want to pay for a home. They may offer a certain amount, but are willing to pay extra if needed, in order to get the house. It basically means that you have put in your offer, but if someone else puts in a higher offer, you are willing to go over their offer by a certain amount. However, it also states that you have an end price in mind that you won't go over.

So, what does this really mean?

You may put in an offer $5,000 below the asking price, but are prepared to go over the asking price by $10,000. So, if the house was listed at $200,000, you would have stated in your contract that your bid is for $180,000. In your escalation clause, you may write that you would be willing to pay $1,000 more than the highest offer, though you were only willing to pay $210,000 dollars.

If another bidder writes a contract for the full price, your bid would automatically go up to $201,000, thus winning the house. This also works if there are multiple bidders. If another contract came in for $205,000, your contract would automatically go to $206,000. However, if their contract was for $210,000, they would get the house because you were not willing to spend any more than that.

How do I know that I need to put one in my contract?

  • In today's competitive market, you may want to put an escalation clause in your contract. This is especially true if you know that the home that you want is going to have multiple offers. When your real estate agent talks to the seller's agent, they may know right away that there are a lot of showings booked, which could mean multiple offers will be coming in.
  • Escalation clauses are also a good idea when there are multiple offers because it shows all of your cards on the table. If you just put in a regular contract without an escalation clause, there is a good chance that you won't get the house. The sellers won't make a counter offer because they have plenty of other choices to pick from. Your clause may be the only reason why you get a home.

What are some reasons why I shouldn't put one in my contract?

  • There are some real estate professionals who don't want to work with escalation clauses. They want to be able to show their buyers exactly how much money someone is willing to spend on their home.
  • It can also be damaging when there aren't multiple offers. When you do this, you are basically telling the sellers that you would be willing to pay much more for their home. There won't be as much negotiating, and you may lose the power that you have during the back and forth process between a buyer and seller.

If you have truly found a home that you would be proud to call your own and know that there are going to be multiple offers on the table, you may want to talk to your real estate and mortgage lender professional to see if an escalation clause may be necessary to win the house. You may have to put all of your cards on the table if you want to be able to call that home yours.

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