What is an escalation clause?
In this competitive housing market, often there are multiple buyers vying for the same property. Besides dropping contingency and offering flexible closing date, some buyers will offer an escalation clause.
An escalation clause is a provision in a real estate offer to purchase that allows a buyer to increase their offer in response to competing bids. Here’s how it works: The buyer makes an initial offer on the property. This offer includes the escalation clause, which specifies the conditions under which the buyer is willing to increase their offer. If another buyer submits a higher offer, the escalation clause automatically increases the buyer's offer by a specified amount, up to a predetermined maximum limit set by the buyer. The seller is typically required to provide the buyer with documentation of the competing offer triggering the escalation clause. The seller can choose to accept the escalated offer, counteroffer, or reject it altogether.
From the buyers’ perspective, an escalation clause can give them a competitive edge in a seller's market by automatically increasing their offer to outbid competitors. However, buyers using escalation clauses risk paying more for the property than they originally intended, especially if they set a high maximum limit.
As a seller, you may benefit from an escalation clause as it can drive up the sale price of the property. However, there may be concerns about the fairness and transparency of the process, leading to potential disputes or negotiations. In the high-end market, escalation clauses are rarely accepted because most sellers would rather see a viable buyer who brings in a great offer from the start, rather than with a small increase to drag on the negotiation process.
Overall, escalation clauses can be a useful tool for both buyers and sellers in competitive real estate markets, but they require careful consideration of the potential risks and benefits by both parties.
