If you’ve made any moves in real estate during a seller’s market, you may have heard of the escalation clause or even used it once or twice yourself in a multiple-offer situation, but for those who aren’t familiar, in a nutshell, it works a little like ebay or an auction.
When you submit an escalation clause with your offer to purchase a home, you tell the seller you are willing to pay a certain amount more than any other buyer up to a maximum amount. In other words, if you submit an offer on a home, but don’t want to risk the chance of getting outbid or paying too much, you can include this clause as a safeguard, allowing your offer to automatically increase based on the competing offer, up to a point you deem appropriate.
But when and how does one utilize this mighty tool of influence?
Generally speaking, you can prepare an escalation clause along with your offer, so that you’re ready if other buyers do write an offer that surpasses yours. The amount you choose to escalate to will be at your discretion, with the advice of your real estate agent.
For example, if another buyer is willing to pay $615,000 for a property you originally offered $610,000 on, your escalation clause could state that you are willing to pay up to $650,000 for this property and are prepared to escalate (surpass) other offers in $6,000 increments—until you reach your cap of $650,000.
While escalation clauses can give you additional “control” over your offer, the downside to delivering one too soon (when there is no competition) is the seller will see that you are willing to pay more than your offer price, and if you’re trying to negotiate a lower price, it may not be advisable to show them the highest amount you are willing to pay. If there is a competing offer however, keep in mind you are no longer negotiating with the seller, but rather in a bidding process with the other buyer, where showing your high number doesn’t necessarily mean you will end up paying it, but just that you are willing to pay it.
