Here at Solutions, we recommend that our Buyers get pre-qualified with a local Charlottesville lender so they can be ready to move quickly as soon as that “just right” house hits the market.
What is an Escalation Clause?
This leads us to the question of the escalation clause, which is defined as “a real estate contract, sometimes called an escalator, that lets a Buyer say, ‘I will pay x price for this home, but if the Seller receives another offer that’s higher than my x price, I’m willing to increase my offer up to a max of y.’”
When to use an Escalation Clause
Escalation clauses are most commonly used by Buyers making an offer for a house that is well priced in a desirable location and particularly during times of strong demand and low inventory such as we are experiencing now. Built-up Buyer demand can lead to multiple offers for that “just right” house.
For example, Buyer Ms. Smith offers $200,000 for a home. Her Realtor advises her to include with her offer an escalation clause that, in the case of a higher competing offer, will increase Smith’s offer in increments of $2,000 above the competing offer. Her escalation clause goes up to a maximum purchase price of $210,000.
If no other offers are submitted, Smith’s offer remains at $200,000. If another Buyer offers the seller $203,000, then Smith’s offer would escalate to $2,000 above that, bringing Smith’s offer to $205,000. If yet another Buyer offers $211,000 for the home, then Smith’s maximum of $210,000 will be eclipsed, and the third Buyer will have the top offer. This example assumes that the Seller is only interested in the highest price offer.
Escalation clauses should only be used when the Buyer, based on information that their Solutions agent has researched, thinks that there is a reasonable chance that there will be competing offers and the Buyer is willing to pay a higher price to beat out the other offers. It is important to note that when a Buyer submits an offer with an escalation clause, they’re essentially laying a full deck of cards on the table and the Seller has more insight into what the Buyer is willing to pay.