What is an Escalation Clause?
In today’s highly competitive real estate market, a buyer has to be able to stand out when a seller is receiving multiple bids. An accredited real estate professional will be able to provide guidance and helpful tips for submitting an offer, which sometimes can include adding an escalation clause. If you are unfamiliar with what an escalation clause is and how it’s used, keep reading to learn more from the experts at Hudler Homes!
What is an Escalation Clause?
Sometimes referred to as an “escalator,” an escalation clause is a statement in a real estate transaction contract that says the prospective buyer is willing to raise their offer on a home if the seller receives a higher competitive offer. Usually, the escalation clause will state exactly how much higher the buyer is willing to pay should the seller receive multiple offers. In short, the escalation clause can offer buyers some wiggle room if other potential buyers try to outbid them. Escalation clauses are communicated between the potential buyer’s real estate agent and the seller’s agent at the time of the original offer. The escalation clause goes into effect when the seller has proof of a higher offer from another potential buyer. That is when the escalation clause becomes enforceable.
Why Use an Escalation Clause?
As we mentioned above, we are in a very competitive real estate market and have been for over a year. Potential buyers are losing out on homes because of multiple offers and bidding wars. While it helps to have an accredited real estate professional guiding you through the process, adding an escalation clause into your offer could show a seller how serious you are about purchasing their property. Keep in mind that an escalation clause may not always work for your individual real estate transaction needs, so be sure to speak with your real estate professional before pursuing this route.
What are the Drawbacks to Using an Escalation Clause?
Including an escalation clause in your real estate offer is not always the best option. Here are a few reasons why they may not work for your particular situation.
Negotiating is off the table once an escalation clause is accepted. The potential buyer loses out on bargaining power because the seller knows the highest amount the buyer is willing to pay.
When an escalation clause is accepted, the seller can no longer counteroffer other buyers.
If a potential buyer includes an offer price that is higher than the home’s appraisal value, they may not be able to get a lender to approve their asking price. A lender will never approve a loan amount that is higher than the appraised value of the property.
Work with Hudler Homes
If you have additional questions about how escalation clauses work, please reach out to me! The right real estate agent can guide you through the complicated process of submitting an offer and assess if an escalation clause is right for your situation. If you are looking for a real estate agent who knows the Baltimore area and can help you explore your options, I’d love to meet with you. Reach out to me through my website or give me a call at (302) 545-8569, and follow my blog for more home buying tips!