Are you facing a booming real estate market where bidding wars are becoming the norm? You need to master the art of creating a compelling escalation clause.
Offering an edge in multiple offer situations, an expertly crafted escalation clause could make the difference between securing your dream property or missing out.
In this comprehensive guide, we’ll delve into the intricacies of writing an escalation clause for real estate, equipping you with practical skills for making your offer stand out in a competitive housing market. Prepare to get ahead and win the property war!
Writing an effective escalation clause for real estate involves specifying the initial offer price, the predetermined amount to increase the offer if a higher offer is received, and setting a maximum cap.
It’s essential to consult with a real estate professional or attorney to ensure the language and structure of your clause align with local regulations and best practices. For personalized guidance, our website offers a detailed step-by-step guide on crafting a solid escalation clause that can help you increase your chances of success in competitive real estate markets.
From thirty-eight years of selling real estate, a properly written escalation clause can be the difference maker in being the winning bidder. There have been numerous instances where my clients have landed their dream home by utilizing an escalator.
As a listing agent, I’ve also witnessed many buyers ultimately landing the house because of using the clause. I love seeing an escaltor because I know the benefits my clients receive. As a seller there are few downsides.
Understanding how to write an offer can be a real difference-maker for a home buyer. Use our tips to make it happen.
Interesting Facts and Stats
1. An escalation clause is a provision in a contract that allows for adjusting prices or terms under certain conditions.
2. It is commonly used in real estate contracts to account for potential price increases.
3. The purpose of an escalator is to provide flexibility and protect homebuyers.
4. The specific trigger and mechanism for adjusting prices or terms vary depending on the agreement.
5. Escalators are often used in competitive bidding situations to allow buyers to increase their offers based on competing bids.
6. When buying a house, These clauses have increased by 27% in the past five years.
7. They are most commonly used in competitive housing markets, with a usage rate of over 75%.
8. On average, properties with an escalator clause sell for 5.6% higher than their listing price.
9. Real estate agents report that including them in a contract increases the likelihood of winning a bidding war by 64%.
Understanding the Escalation Clause in Real Estate
An escalation clause can be a powerful tool in real estate transactions. It allows buyers to secure their dream home by beating out competing offers. But what exactly is an escalation clause?
An addendum or provision can be included in a purchase offer. This clause allows the buyer to increase their offer price automatically if another higher offer is received, up to a specified maximum limit.
In other words, it safeguards against losing a desired property due to a higher bid.
For instance, imagine you’re interested in purchasing a house listed at $500,000. You decide to include an escalation clause in the contract with a maximum cap of $550,000. If another buyer submits an offer of $520,000, your escalator clause will automatically increase your offer to $521,000. The idea is to ensure that you stay competitive throughout the negotiation process.
When utilizing an escalation clause in real estate contracts, it's crucial to consider several factors. Setting an appropriate cap and understanding market conditions is crucial.Click To TweetEffectively navigating these elements will help maximize your chances of securing the property.
Purpose of an Escalation Clause
The primary purpose of incorporating an escalation clause into your real estate offer is to demonstrate your willingness and capability to compete with higher bids without risking overpaying for the property.
By including this clause, you clarify to the seller that you’re prepared to go above and beyond other offers. However, you also control how much you are willing to pay.
Furthermore, an escalation clause allows potential buyers to be proactive rather than reactive during a bidding war. Rather than constantly revising and submitting new offers each time there is competition, the clause saves time and effort by automating the process based on predetermined parameters.
Using an escalator clause can also help streamline the negotiation process by reducing the need for counter-offers. It signals the seller that you are serious about acquiring the property and will adjust your offer to secure it.
For instance, a seller receiving two offers of $500,000 and $525,000 without escalation clauses may counter both parties or accept the highest offer outright. However, suppose the highest offer includes a clause that states the buyer is willing to increase their offer by $5,000 above any competing bid.
In that case, the seller can confidently engage with the buyer based on this predetermined condition.
Utilizing an escalation clause is a strategic tool for buyers to position themselves competitively in hot real estate markets while maintaining control over their maximum offer price. It is one of the tools I’ve discussed to win a bidding war.
Example Escalation Clause to Be Used When Writing an Offer
The following is simplified escalator language that can be used when writing a real estate contract.
If the seller receives a bona fide offer from another buyer, the buyer agrees to increase their offer price by “X” dollars increment above the competing offer up to a maximum price limit of “Y”.
The language must be unambiguous so all parties understand what is being offered.
Evaluating the Pros and Cons
Writing an escalation clause for a real estate offer requires examining its advantages and disadvantages. Like any strategy, there are potential benefits and drawbacks before implementing a real estate escalation clause.
On one hand, using an escalator clause can significantly increase your chances of winning in a competitive market. It allows you to automatically increase your offer if someone else offers a higher amount, giving you an edge over other potential buyers. This can be especially advantageous in a seller’s market where bidding wars are common.
However, there are potential risks involved. Overpaying for a property is a concern when using an escalator clause since it automatically increases your offer without a cap.
High offers that don’t waive the appraisal contingency may fall through if the house doesn’t appraise for the escalated price. With bidding wars, it is not uncommon for there to be an appraisal gap that needs to be addressed.
It’s important to carefully evaluate these pros and cons in the context of your specific situation and the real estate market you’re operating in. With a solid understanding of both sides, you can decide whether to include one in your offer.
The Art of Crafting an Effective Escalation Clause
Crafting an effective escalation clause requires careful consideration of key elements to maximize its impact.
Here are some essential components that should be included when drafting your escalation provision:
- Starting Offer: Begin by specifying the initial offer amount for the property. This serves as the foundation upon which the clause operates.
- Escalation Amount: Determine how much you’re willing to increase your offer if another buyer submits a higher bid. You can set this as a fixed dollar amount or a percentage above competing offers.
- Cap Price: Establish a comfortable upper limit or price cap. This prevents overpaying and ensures that your offer remains within your budget.
- Verification of Other Offers: Include a provision that requires verifiable proof of competing offers. This is crucial to avoid potential manipulation or false claims by sellers or listing agents. It is referred to as a “bona fide offer.”
- Communication and Timing: Specify the manner and timeframe in which you should be informed about competing offers and allowed to adjust your offer accordingly.
Each element shapes your escalation clause to align with your objectives. Therefore, it’s essential to consult with a Realtor or real estate attorney who can guide you through the process and ensure that your clause is legally enforceable.
Protecting Your Interests with Limits and Conditions
While an escalation clause can strengthen your offer, protecting your interests by including limits and conditions is crucial. These safeguards help prevent potential risks and pitfalls.
Here are a few considerations to keep in mind:
- Appraisal Contingency: Consider waiving the appraisal contingency only if you can comfortably cover the amount above the appraised value. Otherwise, it’s advisable to retain this protective clause to avoid overpaying.
- Inspection Contingency: Retaining the inspection contingency ensures you can thoroughly inspect the property and negotiate repairs or seller concessions if necessary. This protects you from unforeseen issues that may arise after closing.
- Financing Contingency: To safeguard your offer in case you encounter challenges securing the necessary loan within the specified timeframe, maintain a financing contingency. This contingency allows you to back out without penalty if your financing falls through.
- Seller’s Counter-Offer: Prepare for the possibility of receiving a counter-offer from the seller that meets or exceeds the cap stipulated in your escalation clause. Evaluate whether you can meet counter-offers before including an escalator in your initial offer.
By setting limits and conditions, you can ensure that the escalator clause remains advantageous while safeguarding yourself against potential risks.
However, you need to remember the more contingencies you add, the less likely your offer will be accepted. While the sale price may be important, everyone has different hot buttons. You may have the highest offer on the table, but if the seller values a specific closing date, it may not matter.
It is essential to have your real estate agent gather this information before writing the agreement. It is one of the best pieces of advice I can give you. Don’t take a chance on what is vital to a seller.
Real-life Escalator Clause Example Scenarios and Outcomes
Real estate markets can be highly competitive, particularly where housing demand exceeds supply. In such scenarios, escalation clauses can facilitate successful negotiations for potential buyers.
For instance:
- Imagine a desirable neighborhood with multiple buyers vying for the same property. Buyer A makes an offer for $460,000. Buyer A includes an escalation clause in their offer, setting the escalator increment at $10,000 and a maximum purchase price of $500,000. Buyers B and C also submit offers at $450,000 and $460,000, respectively. As per the clause, Buyer A’s offer automatically increases to $470,000, securing them the winning bid.
- In another scenario, Seller X lists their property and requests interested buyers to submit their highest and best offers by a specified deadline. Buyer Y submits an offer of $380,000 with an escalator set at increments of $5,000 up to a maximum price of $400,000. Buyer Z submits an offer of $390,000 without an escalation clause. The seller accepts Buyer Y’s offer since it ultimately beats Buyer Z’s offer.
These real-life scenarios highlight how escalation clauses have helped buyers secure properties in competitive situations. Buyers can gain a competitive edge by leveraging this strategy effectively and structuring the clauses wisely within their offers.
From experience, representing buyers and sellers it is vital to have a healthy escalator. I would recommend $5000 as a minimum figure. You need to make the escalator enticing for the seller. Many agents make the mistake of having a low escaltor such as $1000.
There are many terms in an offer besides price. An escalator of $1000 will likely not make much difference to a seller if other terms are less desirable. It is vital to remember this when crafting an offer.
There Are More to Offers Than Price
Remember, real estate escalation clauses only speak to price. Many other terms in an offer could influence a seller’s decision. For example, the closing date could be critical to the owner.
Other buyers could be offering cash, which is a significant variable in being a winning bidder. It’s a big deal when sellers don’t have to worry about buyers getting a loan.
There are no appraisals or worries a buyer will not get a mortgage. When writing an offer in a competitive seller’s market, you must put your best foot forward with all the terms.
Interesting Studies and Statistics
- A 2023 National Association of Realtors study found that around 20% of successful offers included an escalation clause in multiple-offer situations.
- According to data provided by Zillow, homes with multiple offers – where escalation clauses are most commonly used – made up nearly 60% of sales in some competitive markets in the U.S. in the first half of 2023.
- A recent survey by Real Trends showed that approximately 30% of real estate agents have reported using escalation clauses in contracts more frequently in 2023 than in previous years due to heightened competition.
Final Thoughts
A carefully written escalation clause can often differentiate between winning and losing when multiple offers exist. To increase your chance of winning, the bottom line is finding out what terms the seller wants most.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided information on how to write an escalation clause. He is an expert in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications he has been featured in. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. Bill has helped people move in and out of Metrowest towns for the last 38+ years.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge MA.
