When you get into a bidding war on a house, an escalation clause can keep you one step ahead of the competition. When you choose to escalate your offer on a home, you’ll be able to automatically keep outbidding the rest of the pack, up to a limit you set. Be careful not to overextend yourself!
How escalation clauses work
When you make an offer, you can add an escalation clause (also known as an escalator.) Your initial offer will stand unless someone outbids you, in which case your offer immediately is raised to beat the other offer by a preset amount, up to a limit you choose.
Escalator example
Suppose you make an offer on a home for $190,000, but you know you can afford to go as high as $210,000. You can set up your escalation clause to increase in increments of $5,00, up to the limit of $210,000.
If Mr. Smith is also seeking to buy the same house and offers $195,000, your offer will automatically increase to $200,000. If Ms. Jones offers $205,000, you can offer $210,000. At that point, if neither Mr. Smooth or Ms. Jones chooses to raise their offer, the seller will likely accept yours.
If another buyer comes in higher, you’ll have to decide if the game has become too rich for your blood or if you want to bump your offer again. You might also try negotiating other options with the seller.
Seller’s right to refuse an escalation clause
A seller has the right to refuse offers with escalation clauses. This is usually the case when it’s a high demand property. The seller can ask for everyone’s best offer and make their decision instead of watching buyers play a bidding game.
An escalation clause also can show your hand. It’s written into your offer what your hard limit is, so the seller knows your best offer anyway. They may counter with that amount and refuse to budge because they think they have the upper hand.
If you have a good agent, you may be able to simply skip escalation clauses and work closely with them to stay in communication with the seller. SOmetimes the person who gets to buy the home is just the person the seller likes best, even if they have a slightly higher offer on the table. It’s worthwhile trying to build a relationship instead of playing games.
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