Real Estate Blog

As the housing market continues to heat up, buyers are finding themselves competing aggressively over properties. When you find yourself in a multiple offer situation, you always want to figure out creative ways to make your offer stand out. Have you heard of an Escalation Clause? This nifty tool might be your next best friend when it comes to dealing with an aggressive seller’s market.

If you know you want a specific property and are willing to pay a premium to ensure you get it, let’s consider adding in an escalation clause. Here’s what that looks like. First off, we need to write the contract with a full set of attractive terms - Strong sales price, solid funding, minimal requests, quick closing timeline, etc… Then it’s time to add the icing to the offer - write in an escalation clause. This clause typically says something like, “we agree to pay $X more than any other buyer’s offer, up to a specific limit or cap.” A good example would be if we find a $250,000 home listing, we could write a contract at a $250,000 sales price, and then state that the buyer is willing to offer an additional $2,000 above any offers that exceed your $250,000 offer up to $270,000. This would mean that if another offer came in that was say $255,000, then you would be willing to pay $257,000 for the property. As long as another offer doesn’t come in that exceeds $268,000, then the seller would be obligated to sell you the property. The seller would certainly need to provide proof of the additional offer for validity. Once the seller agrees to accept a specific offer, the escalation clause is completed and the price is set. In other words, the pricing doesn’t continue to escalate after the seller has signed an acceptance - no future back-up offers could trigger additional escalation in pricing. 

Obviously there are a few concerns about this method for a buyer to consider. First would be how much are you willing to pay above market value? The other would be appraisal value. If there is a loan involved, the property will still need to appraise for the value of the contract. If it does not, then the buyer may find themselves needing to put more cash down to make the loan work. 

If you find yourself hoping another buyer doesn’t beat you out of that next hot listing, consider adding in an escalation clause to give your offer the winning edge!