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In competitive markets, buyers have to do everything that they can to help their offers stand out from the crowd. Sometimes that even means including an escalation clause. If you’ve been wondering whether an escalation clause can help you buy a home, keep reading. Below you’ll learn what an escalation clause is, how the clause works, and what effects it can have on your offer.
What is an escalation clause?
As the name suggests, an escalation clause is a clause that can be included in a purchase offer. If there are multiple offers on the home, this clause allows you to increase your suggested purchase price in order to avoid getting outbid.
Typically, there are three important parts to an escalation clause:
- Proof of a bona fide offer: Sellers can’t just use an escalation cause to secure a better sale price. In order for the clause to go into effect, the seller must be able to provide proof that another offer came in higher than yours.
- An escalation amount: The escalation clause will also include the amount by which you would like to outbid any other offers. If, for example, another party offered $400,000 and your escalation amount was $5,000, the escalation clause would increase your offer to $405,000.
- A price cap: The cap represents the maximum amount that you’re willing to pay for the home, or how high you’re willing to allow your offer to go.
How escalation clauses can help your offer
Essentially, using an escalation clause cuts out the middle man on price negotiations. Normally, when there are two competing offers on a home, the listing agent will negotiate with both parties to see who is willing to put forth the highest and best final offer.
With an escalation clause, there’s no need for all of that back-and-forth because you’re position is written out on paper. It also indicates to the sellers that you’re very serious about buying the home, which may you an edge over other potential buyers.
How escalation clauses may hurt your offer
That said, escalation clauses aren’t perfect. For one thing, by including your price cap in the contract, you’re more or less laying all of your cards on the table. You’re telling the sellers exactly how much you’re willing to spend on the home, which can hurt your chances of negotiating a better deal.
For another, an escalation clause only considers the sale price. Often, in lieu of paying more money, other factors such as the settlement date or any elected inspections can be negotiated in order to make your offer more attractive to the seller. However, using an escalation clause makes it easier for those negotiation points to be overlooked.