What Is an Escalation Clause When Buying a House?
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An escalation clause allows you to competitively bid on a house with offers that are automatically higher than your competitors.
As you navigate the home-buying journey with your real-estate agent, you might have heard the term escalation clause. So, what is an escalation clause when buying a house?
Essentially, an escalation clause is an indication that you will automatically offer a set amount more than any offers than come in after your offer on a home, which keeps your home offer competitive in a multiple-bid situation.
While an escalation clause could help seal the deal in a seller’s market, its use is often debated. There are potential pitfalls of this added language to an offer for both the prospective buyer and the home seller.
Here are some things you should know about an escalation clause when planning to buy a house.
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What’s in an escalation clause?
Escalation clauses in home offers may vary in the actual wording, but there are key parts that all such addendums share:
- A starting, or original, offer price on the home
- A dollar amount that the original offer will be increased as your offer is outbid
- A cap, or maximum you are willing to pay, on the escalation
These key parts are what set up an automated bidding process for a prospective buyer, so there is less risk of missing out on a home when competition to buy it arises.
How does an escalation clause work?
At first glance, it seems like receiving an offer with an escalation clause would be a win-win situation. If another person comes along and offers a bit more on the house, your offer automatically escalates by a set amount. This ultimately leads to a higher offer and more money for the seller.
The use of an escalation clause when buying a house, however, can make things trickier. With multiple offers and counteroffers, there’s a lot of paperwork and headaches involved. If the seller wants a quick and easy process, the inclusion of an escalation clause might actually be a drawback.
MORE: How to get a mortgage
How an escalation clause impacts the buyer
If you’re in a seller’s market and multiple offers are expected on a home you really want, an escalation clause could be a good avenue to ensure you emerge victorious with an accepted offer on a new house.
You are less likely to miss out on the home purchase because counterbids are automatically made for you. With the cap on the total amount, those counterbids also stop if the competition gets too steep for your home buying budget.
An escalation clause could, however, work against you. Depending on the offer review process the seller has selected, your declared max (which is known to the seller) can drive up the price of the house. In a multiple-review process where the seller considers multiple offers before making decisions, there’s nothing to stop the seller from saying that you are willing to bid to your max.
This could encourage other prospective buyers to make an offer above your cap and take your competitive advantage away.
Home buying is a stressful process in itself, and any anomalies like an escalation clause can complicate the process. If you find yourself in a bidding war with your offer and an escalation clause on the table, expect some anxiety as you await a final result.
Still, provided you’ve capped your offer at a level you can afford, using an escalation clause when buying a house can pay off with the acquisition of the ideal home.
How do I beat an escalation clause?
If you want to buy a home but another buyer has set an escalation clause, you can get around the competing offer by making your offer higher than their maximum offer.
Every escalation clause has a ceiling–a maximum amount of money a buyer is willing to pay for the house. If your offer is higher than their maximum offer, you could buy the house.
Are escalation clauses legal?
Yes, escalation clauses are perfectly legal. Though they can be incredibly frustrating, there is nothing legally wrong with setting an escalation clause.
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