Should I Use an Escalation Clause When Making an Offer on a Competitive Home?

Should I Use an Escalation Clause When Making an Offer on a Competitive Home?
Sammamish Mortgage
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When you make an offer on a home, you may have a range you’re willing to pay. An escalation clause lets you make an offer but automatically increases it if someone else is also making an offer.

What Is an Escalation Clause?

An escalation clause, or escalator, lets you offer a specific amount for a home, but adds that if another seller makes an offer, the offer will automatically increase to another amount.

How Much Should you Escalate your Offer?

The amount by which you offer escalates and how many times you can escalate will depend on how your clause is worded. You might set your offer to escalate to be $2,000 more than the seller’s other most recent offer, with a cap of $15,000 more than your original offer.

Escalation example

Suppose you make an offer on a home for $210,000. Buyer B makes an offer for $215,000. Your offer would automatically escalate to $217,000. Buyer C might offer $220,00. Your offer would escalate again, to $222,000. If the other buyers stop, your offer is the highest. If one of them offers $230,000, your $15,000 cap has been exceeded, and unless you approve a higher offer independently, their offer will be the highest.

Can Sellers Refuse an Escalation Clause?

A good listing agent with a high demand property will likely announce that they will not accept offers that include an escalation clause. They may prefer every buyer simply makes their best offer out of the gate to create a bidding war situation; however, if using an escalation clause is an option it can help you avoid paying more for the home than you have to.

Even if the seller doesn’t prohibit an escalation clause don’t be shocked if they counter your escalation offer with the highest amount you listed in your escalator.  An escalation clause lets the seller know what your best offer is anyway, as caps are revealed, so all a seller would have to do is pit buyers against one another. You lose a lot of negotiation power by showing your hand at the outset.

Before including an escalation clause, decide if one is really needed. If you have a good, communicative real estate agent, you may be able to simply up your offer as needed without disclosing what your maximum offer would be.

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