What is an Escalation Clause?
An escalation clause, also known as an escalation provision, is a contractual provision commonly used in real estate transactions, particularly in competitive housing markets. It is designed to protect the buyer's interests by allowing them to increase their offer price automatically if competing offers exceed a specified threshold. With an expert real estate agent and Accredited Buyer Representative on your side, you will be able to make effective and safe escalation clauses in your offers.
How do they work?
It's actually pretty simple; the clause states that the buyer is willing to increase their offer price by a certain amount over any competing offers, up to a maximum limit. It's important to note that a real estate agent should never be writing this escalation in to your offer, they should only be using attorney and association approved documents which they can then fill in for you and your unique situation. Below is an example of the meat of the escalation clause:
Key Components of an Escalation Clause
While the Massachusetts Association of Realtors form most commonly used in my market is two pages long and also has a full page disclosure, the key parts of the escalation clause are just three components:
The initial offer price: This is the buyer's starting offer price for the property (not shown above)
The escalation amount: This is the fixed amount by which the buyer is willing to increase their offer above any competing offer ($5,000 in the example above)
The escalation cap: This is the maximum offer price that the buyer is willing to pay ($750,000 in the example above)
When competing offers are received, the escalation clause comes into play. If another buyer submits an offer that exceeds the buyer's initial offer, the escalation clause is triggered. The escalation clause instructs the buyer's agent to automatically increase the offer by the predetermined escalation amount, but only enough to beat the competing offer. The buyer's offer is adjusted accordingly before the seller accepts it.
The escalation cannot exceed the maximum cap set by the buyer. If the competing offer exceeds the cap, the buyer has the option to withdraw or renegotiate their offer.
The purpose of an escalation clause is to give the buyer a competitive edge in a bidding war while still maintaining a limit on the price they are willing to pay. It allows the buyer to outbid other offers without overpaying excessively.
Are There Any Risks to Using an Escalation Clause?
Unfortunately these are not a silver bullet that can be used to win your next home, they do come with a pretty large risk. By disclosing what your maximum purchase price is (by using a cap), you are letting the seller know that you are willing to pay the maximum but would prefer not to. Some sellers find this offensive, others understand the reasoning and some will even take advantage of it. A seller is not required to accept an escalation clause and can counter any offer you give them with anything they choose. This means that even if there are no competing offers, a seller could simply counter at your maximum price cap. A home-buyer is not obligated to accept the counter but it's best to know this all ahead of time in case the seller tries to use the escalation to their advantage.
What Should I Do?
It's important to note that the use and specific details of escalation clauses can vary depending on local regulations, market conditions, and individual negotiation preferences. Therefore, it's advisable to consult with a real estate professional or attorney when including an escalation clause in a purchase offer. You best bet is to work with an Accredited Buyer Representative and Real Estate Negotiation Expert like Alex! You can contact him anytime at 978-886-3271 with any questions or to schedule a free consultation call. First time home buyers and experienced buyers are all welcomed.