An escalation clause, also known as an escalator or escalator clause, is a provision that can be included in a home purchase offer to help buyers compete in a competitive real estate market. It is a unique way for buyers to increase their offer when faced with multiple competing offers on the same property. Here’s how an escalation clause works:
- Initial Offer: When a buyer submits an offer on a property, they specify the initial purchase price they are willing to pay. This price is often at or near the list price.
- Escalation Clause: Within the offer, the buyer includes an escalation clause. This clause typically states that the buyer is willing to pay a certain amount above the highest competing offer, up to a specified maximum price.
- Maximum Price: The buyer also sets a maximum price they are willing to pay for the property. This is the highest price they are willing to escalate to.
- Escalation Amount: The escalation clause specifies the increment by which the buyer is willing to outbid competing offers. This is typically a fixed amount, such as $1,000 or $5,000.
- Verification of Competing Offer: When multiple offers are received on the property, the seller’s agent reviews all offers, including those with escalation clauses.
- Activation of Escalation Clause: If another offer is higher than the buyer’s initial offer, the escalation clause is triggered. The clause automatically increases the buyer’s offer by the specified escalation amount above the competing offer, up to the maximum price set by the buyer.
- Final Purchase Price: The final purchase price is determined by the escalation clause and is often the highest price the buyer is willing to pay, taking into account the competitive offers.
It’s important to note that the exact terms and conditions of an escalation clause can vary, and they must be clearly outlined in the buyer’s offer to avoid any misunderstandings. Additionally, sellers may have their own preferences regarding escalation clauses, so it’s essential to consider whether the use of such a clause aligns with the seller’s expectations.
Escalation clauses can be beneficial for buyers in a seller’s market where competition for properties is fierce. They allow buyers to signal their willingness to pay more than the competition while still having a limit on how high their offer will go. However, using an escalation clause should be done with careful consideration and guidance from a real estate professional, as it involves strategic negotiation and understanding of market conditions.