When you are placing an offer on your dream home, you can add an escalation clause that will help increase your chances of beating any competing offers. An escalation clause will automatically increase your offer to beat a competing offer, and there is usually a maximum amount of money attached to the clause, so if the competing offers exceed that amount, your bid will stop automatically increasing.
What Goes into the Escalation Clause
When you are including the escalation clause in your offer, usually you include your offer, what you are willing to raise your offer to in order to compete, and the maximum amount you are willing to pay.
For example, you want to place an offer of $150,000 on a home, but you are willing to raise your bid in $1,000 increments, up to a total of $200,000. Some clauses also include something that says the seller’s agent must present the competing offer as proof of it, with the other buyer’s personal information blacked out and only the amount of their bid showing.
Should I Use the Escalation Clause?
In a competitive market, this can be a great tool to increase your chances of winning the house. However, it is not always necessary or appropriate to include an escalation clause in your offer. While you may fear to lose your dream house to another buyer, if you are not in a competitive market, that is not a terribly common occurrence.
If you do not know that you are competing with a lot of other buyers, it may not be necessary to include one in your offer, and even if you are competing with others, your bid may not be turned down for someone else. Using the clause when it is not completely necessary can end up leading to bidding wars.
It is also important to keep in mind that while you are told there are others who have placed offers on the home, the seller’s agent is not giving you the amounts in those other offers. You could be placing an offer that is already much bigger than your competition without even knowing it.
The Benefits of the Clause
The big benefit of using the escalation clause is that it can help give you some peace of mind when you are making an offer for your dream home. This can give you a better chance of winning your dream home, while still helping you avoid spending more on the property than you need to.
The Drawbacks of the Clause
One drawback to consider is that the escalation clause may end up getting overlooked, especially if the agent who represents the seller does not know exactly how these clauses work. These clauses have become fairly common, but that does not mean every agent has worked with them before and understands how they work. If the clause gets overlooked, you may end up losing the bid on the house. The best way to ensure it does not get overlooked is to make sure the agent representing you makes a point of noting the clause when submitting your bid.
Another drawback is that you will be letting the seller know how badly you want the house, and even if they do not have any other offers, they may choose to give you a counteroffer because you might be willing to deal. Some sellers may be unhappy that you are not offering the top amount right away, which can frustrate them, and it takes away your bargaining position entirely. There are also some sellers that just do not want to look at offers with escalation clauses because the math involved can be a hassle.
The final price you agree on with the seller can be another drawback to using the escalation clause. While you might be fine paying above market value for the house, your lender might not. Once the home is appraised, if there is a huge difference between your offer and the market value of the home, you may have to make up the difference. This is something you have to be cautious about when using the clause, because you may end up trying to renegotiate with the seller or come up with the money yourself. Neither of these options are easy, nor are they guaranteed to work.