The real estate market can be similar to the stock market. Just like the stock market, it is cyclical. During the spring and fall, the market heats up, then in summer and winter, it slows down. Just like any stock the prices rise and fall as the market can bear them. In the case of homes that have multiple offers, any advantage you can get is helpful. As a buyer, it’s hard to stand out, but there are a few things you can do. One of those things is called an escalation clause.
What is an escalation clause?
An escalation clause is meant to be used in a multiple offer situation. It is a way for a buyer to set their price to automatically go above any other offers. The buyer and agent will set it up that any offer will be beaten by a pre-set amount. The buyer will set up a cap that they will not go over in this situation.
Escalation clauses are generally meant to be used in a situation where the price looks like it will go over the list price. An agent will give a buyer this option if they really want the house. It can be especially effective if the price is below the buyer’s maximum budget.
What are some disadvantages of an escalation clause?
Even though the other buyers won’t see the offer, the seller will. This shows the seller what your maximum offer is and can keep them from even accepting this clause. The seller can take this information and counter with your maximum offer and not accept the clause.
In addition, the escalation clause is also a disadvantage to the seller. By accepting an offer with an escalation clause, a seller takes the other offers off the table and don’t know how much they would have countered with. This could cause the seller to lose money they may have received other offers.
What are some advantages of an escalation clause?
For the buyer, it helps keep your offer on the top of the competition and assures that you will come out on top as long as other buyers don’t go over your cap. It also gives you a better chance of getting a price closer to the next best offer than if you did it blindly.
If the escalation clause is used, the seller then has to present the complete competitive offer so you know it was necessary and not just used to cause an artificial price increase.
Make sure you know all the facts and risks before you go into an escalation clause. Also, make sure you will be happy living in the property and are good with the price before going into the bidding process. If you do so, an escalation clause can be just the right move for you.