The real estate market is truly competitive these days, and most buyers are trying to figure out ways they can make their offer better to win and secure their dream home.
One of the ways to help you land your dream home is through an escalation clause. What is it and how do you use it in negotiating real estate?
What Is an Escalation Clause?
An escalation clause is an addendum that your real estate is going to add to your purchase offer documents. In that escalation clause, you are agreeing to increase your offer over and above any competing offers by a certain amount of money.
Here’s an example:
There’s a $100,000 property and you make an offer for a $100,000. However, you understand that this is a hot property that is in high demand and many people would like to purchase it. Thus, it will most likely get multiple offers.
In order to make your offer stand out and possibly be the one that gets accepted, usually, your agent will suggest that you add an escalation clause. So, your offer is $100,000 but the escalation clause will be worded that you will beat out any other offer up to a certain amount, let’s say, $110,000. This means that you will beat offers up to $110,000 by an increment of $1,000.
How will your offer be selected in the case described above?
If there are other offers in place and the next highest offer is $109,000, you will then be agreeing to increase your offer by $1,000 over the $109,000, maxing out at $110,000.
That is essentially how the escalation clause works, but there are a couple of keys to that clause.
Since you are going beyond the $100,000 price, it must be made clear whether that additional $10,000 will be added to your loan or paid in cash. Adding it to the loan will increase the loan amount and will require the property to appraise for that $110,000 amount.
The other option is to pay for the difference in cash. Paying for the difference in cash is considered to be the better option as that will waive the appraisal requirement. As you may not know, appraisals in a market like this are slow to catch up.