Using an Escalation Clause in Today’s Market

Have you ever heard of an escalation clause?

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What in the world is an escalation clause, and as a buyer, should you even use one? Today I’ll answer both of these questions and more.

If you’re thinking of buying a home in 2021, just know that so many other people are thinking the same thing. In fact, for every home that’s available to buy, there are typically between 10 and 30 other people looking at it. That means homebuyers are in for some tough competition. So how do you compete in this market?

A good tactic is to use an escalation clause. An escalation clause is a section of your contract that states you will pay a certain amount above any other offer but not more than a limit that you set for yourself. For example, you might offer $200,000 for a home, but if another offer comes in, your escalation clause might raise your offer to $210,000 or up to your cap amount (let’s say $212,000). Keep in mind that some states don’t allow for escalation clauses in contracts, so be sure to check with your agent.

The good news is that with this tool, you have an opportunity to stay in the game—hopefully all the way to the end, where you end up winning the bidding war.

Escalation clauses are a great tool, but they do bear some consideration.

The bad news is that with escalation clauses, all your cards are on the table. In the earlier example, you said that you were willing to go up to $210,000, so the seller may raise the price to $210,000 or higher. Another issue is when an appraiser comes along and states that the house is worth less than the offer price. If you agreed to pay $210,000 and the seller accepted your offer but the home doesn’t appraise to that amount, then you’ll need to find a way to make up the difference. Many buyers are removing their appraisal contingencies, but even if you left it in your contract, you’d still have to make up the difference. You might end up having to renegotiate and your contract could potentially fall apart due to the appraisal.

As a final piece of advice, think about the state of the market now and compare it to what you want. For example, if you bought a house now and then got transferred for your job in five years, would the market be as high then, and would you get a good price for it? It’s hard to say, but consider whether you’re escalating your offer because you’re thinking ahead or if it’s just a tool to help you get what you want in the moment. Escalation clauses are a great tool, but they do bear some consideration.

If you have any questions about escalation clauses and how they work or you’d like more information about what it takes to compete as a buyer in this market, feel free to reach out to me. I’d be happy to put you in touch with one of our buyer specialists to talk to you in more detail. Hope to hear from you soon!