Should You Use an Escalation Clause?
Escalation offers can keep other buyers from swooping in and purchasing the home of your dreams. As well as cause problems when they are used unnecessarily. Here’s what home buyers need to know about escalation clauses, along with considerations for when they might or might not be a good idea.
What Are They?
Escalation clauses are used to improve a home buyer’s chances of succeeding against other competing offers. The clause automatically increases the buyer’s offer in order to beat any competing offers without overpaying for the home. Escalation clauses usually have upper limits on the amount the final purchase price is allowed to elevate.
While they can be useful, escalation clauses are not always acceptable or appropriate. Although buyers often worry that other buyers will beat them with a better offer, this is usually not a common concern. If buyers know for certain that they will be competing with multiple offers, they should avoid using escalation clauses in their offers.
When Should You Use an Escalation Clause?
When weighing the potential benefits of using an escalation clause, you need to consider the market, seller and your individual situation. You should also consider the following:
Is the market really that competitive? You should consider using an escalation clause if you really want a specific home and you’ve been told you will be going up against multiple offers. While it’s easy to worry that someone might swoop in out of nowhere and outbid you, you need to be reasonably sure it’s an actual possibility.
Are escalation clauses common in your market? In certain markets, escalation clauses are simply not done or have fallen out of favor. Be sure to thoroughly discuss the prospect with your real estate agent to make sure you aren’t committing a sort of faux pas by submitting a clause. Also, understand that many sellers will flat-out refuse to accept escalation clauses.
How much will you pay? In certain markets, an escalation of $750 will be enough. If you’re bidding on a luxury $700,000 home, you may need to beat out competing offers by as much as $5,000. It’s very important to understand your market and situation. Have a lengthy discussion with your agent to target the appropriate amount for your escalation clause.
Can you really afford to go that high? Before you decide on the amount of your escalation clause, make certain you are really willing to go to the absolute top of the offer. You should always bear in mind that the very fact that you are submitting with an escalation says you will probably have to elevate your price over your initial offer.
What will the seller’s agent think? One of the main issues with submitting an escalation clause is that the seller is able to see how much you can actually afford. This may cause the seller or their agent to wonder why they should accept anything lower than a maximum offer. It may also make the seller feel as though you are low-balling them if you are able and willing to escalate over your first offer.
What will your lender think? It’s important to remember that if you choose to escalate, you will need to come up with more money to stay at the down payment threshold. If you can’t find this extra money, your loan terms will change. Therefore, you’ll need to make sure your escalation clause won’t push you outside your pre-approval zone.
How will it affect the appraisal? Just because you are willing to pay a certain amount of money for your dream home doesn’t mean the property is actually worth that amount. If you need to secure financing to buy the home, what you’re willing to pay may not equal the bank’s appraisal value. Get an appraisal contingency as part of your offer to better anticipate this issue.
Always ask for proof. If a seller accepts your offer based on your escalation clause, be sure to get proof that someone actually put in an offer that surpassed your initial bid. This is an important step to make sure you aren’t getting taken advantage of.
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