Escalation Clause
An escalation clause is a strategic tool used by homebuyers in competitive real estate markets to increase their chances of winning a bidding war without overpaying for a property. This clause allows buyers to submit an initial offer while also expressing their willingness to pay more if necessary, up to a predetermined maximum amount.
Key aspects of an escalation clause include:
- Initial offer: The buyer submits a base offer price for the property.
- Escalation amount: The clause specifies how much the offer will increase above a competing bid (e.g., $1,000 or $5,000).
- Maximum price: The buyer sets an upper limit on how high they're willing to go.
- Proof of competing offer: The clause typically requires the seller to provide evidence of a bona fide competing offer to trigger the escalation.
For example, a buyer might make an initial offer of $300,000 with an escalation clause that increases the bid by $2,000 above any competing offer, up to a maximum of $320,000. If another buyer offers $305,000, the escalation clause would automatically raise the first buyer's offer to $307,000.
While escalation clauses can be effective in winning a bidding war, they also come with potential drawbacks:
- They reveal the buyer's maximum price to the seller, potentially weakening negotiating power.
- Some sellers may prefer clean, straightforward offers without escalation clauses.
- If the property doesn't appraise for the escalated price, the buyer may need to make up the difference in cash or renegotiate.
Homebuyers considering using an escalation clause should consult with their real estate agent to determine if it's appropriate for their specific situation and local market conditions.
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