Unlocking the Power of Escalation Clauses: Your Key to Winning Your Dream Home
By Mateusz Cieslak, AyAMi Group
Published: February 12, 2024
Introduction:
In competitive real estate markets, buyers often find themselves in bidding wars, competing against multiple offers for their dream home. In such situations, having a strategic advantage can make all the difference. In your offer, you can include the escalation clause—a powerful tool that can help buyers secure their dream home in a competitive market. In this article, we'll explore what an escalation clause is, how it works, and how it can help you emerge victorious in your home buying journey.
Understanding Escalation Clauses:
An escalation clause, also known as an escalator or escalator clause, is a contractual provision that allows a buyer to automatically increase their offer price above competing bids up to a specified maximum limit. Essentially, it serves as a built-in mechanism for outbidding competing offers and increases the chances for winning the bidding process.
Here's how it works in practice: Suppose you are bidding on a house with a certain asking price. You submit an offer with an initial bid and an escalation clause stating that you're willing to pay a certain minimum amount (the initial bid) and a certain amount above the highest competing offer (a predetermined increment), up to a specified maximum price or limit. If another buyer submits a higher offer, the escalation clause automatically increases your offer by the predetermined increment, keeping you in the running until your maximum limit is reached or exceeded. If all other bids are below your initial bid, the escalation clause does not even get activated and your bid remains at your initial bid amount. If there is a bid equal to or higher than your initial bid and less than your maximum limit, your escalation clause is activated and your bid is now increased so that it is higher than the competing highest bid by the predetermined amount; now making your bid the highest one but still below your maximum limit. If there is a bid higher than your maximum limit or a bid with an escalation clause that is above your maximum limit, then your escalation clause is activated and now your bid is equal to your maximum limit but it is not the highest bid. If the highest bid is now slightly above your maximum limit, the seller may still select your bid as the winning offer for many other reasons.
Escalation clause example:
In our example, summarized in the table shown, let’s assume the asking price for the house you want to make an offer on is $420,000. You submit an offer with your initial bid of $410,000 on a home with an escalation clause stating that you're willing to pay increments of $5,000 above the highest competing offer, up to the specified maximum price of $450,000. If all other bids are below your initial bid of $410,000, the escalation clause does not even get activated and your bid remains at $410,000. If there is a bid higher than your initial bid of $410,000 but less than your maximum limit of $450,000, for example $425,000, your escalation clause is activated and your bid is now $430,000 (i.e. $5,000 more than the highest bid, which is $425,000 but still below your maximum limit of $450,000). If there is a bid higher than your maximum limit of $450,000, for example $455,000 or a bid with an escalation clause that is above your maximum limit, then your escalation clause is activated and now your bid is equal to your maximum limit of $450,000.
The escalation clause is a useful tool especially in the seller’s market when there are many competing and aggressive buyers. If you have the means to make an offer much higher than the asking price but do not want to overpay for the property by egregious amount yet you want to maximize your chances of being the winning bid, then the escalation clause is exactly what you need. It allows you to make an offer below asking price, at asking price, or above it, reveal the maximum price you are willing to pay but still make it conditional on other offers.
As outlined below, there are some additional considerations for and against using the escalation clause.
How Escalation Clauses Can Benefit Buyers:
Escalation clauses offer several advantages to buyers in competitive real estate markets:
a. Competitive Edge: In a bidding war scenario, an escalation clause gives you a competitive edge by ensuring that your offer remains competitive without the need for constant back-and-forth negotiations.
b. Transparency: By specifying the maximum limit of your escalation clause upfront, you provide transparency to the seller, demonstrating your willingness to pay a premium for the property but only if there are other offers higher than your initial bid.
c. Flexibility: Escalation clauses offer flexibility in bidding, allowing you to participate in multiple-offer situations while maintaining control over the maximum price you're willing to pay for the home.
d. Time Savings: With an escalation clause in place, you can streamline the negotiation process and expedite the offer submission process, saving time and avoiding potential delays.
e. Safety Net: Escalation clause when drafted with buyer-favorable terms is not binding. In other words, after you are informed about and/or presented with the competing offers, you will still have an opportunity to walk-away from the transaction.
Key Considerations for Using Escalation Clauses:
While escalation clauses can be an effective strategy for winning bidding wars, it's essential to approach their use thoughtfully and strategically. Here are some key considerations to keep in mind:
a. Set a Realistic Maximum Price: Before including an escalation clause in your offer, carefully consider your budget and financial limitations. Set a realistic maximum price that you're comfortable paying for the property, taking into account factors such as market value, comparable sales, and your long-term financial goals.
b. Specify Clear Terms: When drafting an escalation clause, be sure to specify clear terms and conditions, including the escalation increment and the maximum price limit. Clearly outline how the escalation clause will be triggered and any additional contingencies or provisions that apply. A good real estate agent will know exactly what to include in the escalation clause, which will be subject to further review by your attorney once the offer is accepted.
c. Consult with Your Real Estate Agent: Work closely with your real estate agent to craft a winning offer strategy that incorporates an escalation clause effectively. Your agent can provide valuable insights into market conditions, recent sales data, and negotiation tactics to help you make informed decisions.
d. Understand Seller Preferences: While escalation clauses can be appealing to buyers, they may not always align with the seller's preferences or priorities. Some sellers may prefer straightforward offers with fewer contingencies, while others may be open to considering escalation clauses as part of the negotiation process. Consider the seller's needs and preferences when deciding whether to include an escalation clause in your offer. Your real estate agent should guide you through this process and provide additional insights.
Final Thoughts:
In today's competitive real estate market, buyers need every advantage they can get to secure their dream home. Escalation clauses offer a strategic tool for outbidding competing offers and increasing your chances of success in a multiple-offer scenario. By understanding how escalation clauses work, setting clear parameters, and working closely with your real estate agent, you can leverage this powerful tool to win your dream home and embark on the next chapter of your homeownership journey with confidence.
For any questions, reach out to us at the below.
AyAMi Group, Licensed in the State of Connecticut
800 Village Walk #787, Guilford, CT 06437
Phone: (203) 533-9781
