In a very competitive real estate market, it is common for a seller to receive several offers for the same property. Depending on your budget and the market you are looking to purchase real estate, it may be necessary to have an escalation clause to buy the real estate you desire.
The escalation clause, also known as an escalator, is a section in a real estate contract that states that a prospective buyer is willing to raise their offer on a real estate property should the seller receive a higher competing bid. This clause will say how much the buyer is willing to pay more than their original offer and the buyer’s spending limit.
Table of Contents
- What Is An Escalation Clause In The Real Estate Contract?
- The Basics Of How An Escalation Clause Works
- Related Questions
What Is An Escalation Clause In The Real Estate Contract?
An Escalation Clause in Real Estate is an essential tool for buyers and sellers. It helps to protect a buyer’s interests in a competitive market by allowing them to increase their bid on a property if another party makes a higher offer.
An escalation clause is also known as an escalator. The Escalation Clause is a section in the real estate contract that states what a buyer is willing to raise their offer to on a property should a seller receive a higher competing bid.
Escalation clauses can be used when there are multiple offers on a property, allowing the buyer to raise their bid and remain competitive. An escalation clause will also show the seller how serious the buyer is about purchasing the property.
The clause will state how much more you are willing to pay than the highest offer or your spending limit for the property. The escalation clause helps protect the buyers if other potential buyers outbid them.
In an escalation clause, the seller must show that they have a bonafide offer with another buyer. For an escalation clause to be triggered, the seller has to show proof that they have a valid higher offer.
This means that that offer must be legitimate, and it must be enforceable. The seller cannot make up the offer or ask a friend to put in a bid to start a bidding war.
When To Consider An Escalation Clause On The Contract
Not every real estate contract will have an escalation clause or an escalation amendment on the contract. A buyer and the realtor need to understand when an escalation clause should be put on a contract.
That is why if you are thinking of adding an escalation clause to a contract, it is wise to check with a real estate attorney to ensure that you understand the implications of this escalation clause.
Someone would use an escalation clause in a real estate contract because obtaining property in a particular area is challenging as it is a seller’s market.
One of the best ways to use an escalation clause is if bidding wars occur. But an Escalation Clause may not always be the wisest thing to put in a contract for every real estate purchase.
That is why we suggest you talk this over with your realtor and also a real estate attorney to see if you should consider having an escalation clause.
Main Components Of The Escalation Clause
There are three main components in the escalation clause addendum for the contract. These three main areas include.
- Original Bid – this would be the actual price of the property or your initial bid.
- Price Escalation – How much will that price escalate above a competing offer? What percent or amount are you willing to go up if a competing offer exists?
- Maximum Purchase Price – In the event of multiple offers, the maximum purchase price is the maximum amount you are willing to pay for the property if another potential buyer outbids you.
No Guarantee With An Escalation Clause You Will Get The Property
There are different things that some sellers look for when selling their property. Some sellers want to have somebody on their property that they feel will enjoy it and take care of it. For these sellers, it may not be the highest bid they accept.
So, even with the escalation clause in a contract, there is no guarantee that you will get the property. Sellers can decide who they want to sell the property to, at what price, and for what reason. You have no control over this decision or what makes them decide to sell a property one way versus another.
An Escalation Clause Shows You Are A Serious Buyer
Having an escalation clause in a real estate contract can signal to the seller that you are very serious about the property and are willing to go up in price and do what needs to be done for you to purchase their property.
One of the significant downfalls of an escalation clause is that you already told the seller how much more you’re willing to go up on their offer. In other words, you are already letting the seller know that you are willing to pay more for the property than you’re original offer.
Listen To Our Podcast About Escalation Clauses 101: What You Need to Know Before Making an Offer by clicking here.
The Basics Of How An Escalation Clause Works
An Escalation Clause Real Estate example is when a buyer agrees to increase their offer price by a certain amount or percentage if another party makes an offer higher than theirs.
For instance, if the current highest bid for a property is $300,000 and the buyer has agreed to an Escalation Clause of $20,000, they will increase their bid to $320,00 in hopes of having a price that the seller will accept.
A problem like this would be in an appraisal if the home is only worth 300,000, and now you are paying more than the home’s value. Your lender or mortgage company may not be willing to lend you the total amount for the home’s value as the purchase has exceeded the appraisal value.
Lenders are very particular about the real estate market value and want to loan within the amount of a real estate value or what the property has been appraised for. In a case like this, the buyer will have to have the cash to pay for the difference between what the lender will give them for the property and the price they are paying for the real estate.
Escalation Clause in Real Estate is essential in real estate deals as they allow serious buyers to remain competitive in an unpredictable market.
Escalation clauses can be used for various scenarios, such as bidding wars or in areas where it is challenging to get real estate. Escalation clauses help create competition in the marketplace, benefiting both parties involved.
Before you add an escalation clause to your real estate contract, we recommend you discuss this thoroughly with your realtor and talk to a real estate attorney.
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By clicking here, you can read more about Do Modular Homes Come With Electrical And Plumbing?
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