What is an Escalation Clause and When Should it be Utilized?
Deciding what price to offer on a property, especially one that is expected to gain a lot of activity, is no easy task. There are many factors to consider when determining a final offer price in which you feel both comfortable and confident. In a multiple-offer scenario, an escalation clause could be used. This is a clause that allows a home buyer to essentially state “I will pay X amount for this property, but if the seller receives any offer(s) higher than X, I am willing to increase my offer up to the price of Y”. Although this may sound simple, there are many details that should be considered. Typically, an escalation clause consists of the following components:
- What is the original offer?
- How much will that price be increased above any other competitive offer(s)?
- What would the maximum purchase price be in a multiple-offer situation?
For example, a house is listed at $539,000 and expected to receive multiple offers well over the asking price. Couple A is very interested in this property and wants to submit a strong offer that will be considered among the many others. They decide to offer $600,000 for the home with an escalation clause that states, in the case of a higher offer(s), couple A will increase their offer in increments of $5,000 above the competing offer(s). Their escalation clause stated an upside cap of $620,000. If no additional offers are presented, couple A’s offer remains the original $600,000 and the Seller can decide to accept that offer or counter back. If buyer B offers $610,000, then their escalation clause would take effect and couple A’s offer would automatically rise to $5,000 above that resulting in $615,000. If buyer B offers $623,000, couple A’s maximum bid was $620,000 and the escalation clause would not apply.
It is important to keep in mind that some sellers may choose not to accept an offer with an escalation clause. They may prefer that each potential buyer submits their best and final offer as opposed to displaying any variations. Including an escalation clause in the initial round during a probable counter offer situation could put the buyer at a disadvantage when it comes to the second round of offers. If the top offer is disclosed during the first round and used as leverage it can negate that buyers advantage.
It is crucial that the escalation clause is used with caution and that the context of the situation is considered. Writing an escalation clause in the beginning of a multistage bidding war could put your offer in weak position and prove disadvantageous. To ensure that there is no confusion, the Buyer’s Agent can ask the Seller’s Agent if the Seller is open to such a clause.
Navigating through the labyrinth of details and information of a transaction is exactly why you, savvy buyers and sellers, need an experienced team. The SARKISSIAN + PERERA GROUP is here to help guide you through this process and ensure that you achieve all of your real estate goals!
Copyright© 2018 Berkshire Hathaway HomeServices California Properties (BHHSCP) – SARKISSIAN + PERERA GROUP. All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of January 3, 2018. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals.