What is Escalation Clause?

Annamae Last Updated Mar 22, 2020 (0) comment , ,

what is escalation clause

What Is the Escalation Clause?

The escalation clause is also known as the escalator clause. This clause is typically attached to an offer on a home. The potential homebuyer essentially says that they are willing to pay x amount for the home. However, if the seller receives a higher offer, the potential homebuyer says that are willing to increase the offer to y amount.

It usually has a maximum limit.

 

How Does the Escalation Clause Work?

Three essential components go into the escalation clause. First, the original offer is the starting amount. Next, if another bid comes in, the homebuyer must decide how much they will raise the price over the competitive offer. Finally, the homebuyer must set the limit of how high he or she is willing to pay.

Let’s say potential homebuyer Peter offers $100,000 for a home. He has an escalation clause on the real estate contract to increase any other offer by $2,000 with a maximum of $110,000.

If Addison offers the seller $103,000, Peter’s offer automatically escalates to $105,000. If Addison ups her bid to $106,000, Peter’s offer would then change to $108,000. If Addison places a final offer of $111,000, she would have the top offer because the purchasing price has surpassed Peter’s maximum.

 

When Should You Use the Escalation Clause?

When a seller receives an offer with the escalation clause, he knows that the homebuyer is willing to pay more. Some home sellers prefer that home buyers submit what they are willing to pay. In some cases, this may result in less paperwork and a higher initial bidding price.

The clause protects the homebuyer from paying more than necessary to secure the home. However, it is possible that a traditional home seller may choose to ignore the escalation clause if they prefer the highest offer. 

As a result, the escalation clause is useful when there are multiple offers. However, it’s critical that your real estate agent is familiar with the process and can work with the seller to incrementally increase your offer. 

 

(READ: 3 Tips on How to Negotiate Mortgage Rates and Save)

 

Other Considerations

Appraisal Issues

Escalation clauses may cause problems during the appraisal process. If bidding escalates over the appraised amount, you may have difficulty securing the loan.  

Increased Down Payment

As the purchasing price increases, the amount that you’ll need to put down may also increase. A higher or lower down payment percentage may impact your interest rate.

Confirm Competing Offers

If you win the bidding war, you may want to ask for proof of the competing offers. You wouldn’t want to pay more for your home than you need to.

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