In hot real estate markets, some home sellers are intentionally pricing their homes low in hopes of attracting multiple offers and drawing buyers into a bidding war. If you have found the home of your dreams and want to stay out of the bidding war, including an escalation clause in your offer is one of the best ways to help you get the home you want without having to go back and forth with bids. However, many people have never heard of escalation clauses. Here are a few of the things you should know about an escalation clause if you are looking to buy a home that may be involved in a bidding war.
What an Escalation Clause Is
An escalation clause basically states that you and your real estate agent realize the home will likely be involved in a bidding war. For example, if a home is worth $200,00 but the seller has it listed for $150,000, there is a good chance a bidding war will ensue. You can put in an offer of $175,000 but include an escalation cause stating that if a bidding war ensues, you will go up to $210,000 as long as the amount is no more than $2,500 above the other offers. As such, if the maximum bid on the home is $200,000, it will be yours for $202,500. But if someone bids $215,000, it is above your offer and you are no longer in the running for the home.
If a Seller Can Reject an Escalation Clause
A seller can reject an escalation cause. If a seller already has an escalation clause in place that is higher than yours, they may reject it. Others may reject the clause if they feel the escalation amount is lower than the home will go. And others may only want to involve buyers who are actively bidding, hoping they get emotional and drive the cost up. However, many real estate agents advise a buyer to accept the escalation clause as long as there isn't a higher offer. It is basically a safety net the homeowner can fall back on if the offers don't get higher than the escalation clause amount.
What the Benefits of an Escalation Clause Are
As a buyer, the biggest benefit to an escalation clause is that you are not going back and forth in a bidding battle. You have put your best foot forward and the other participants will decide the outcome. The other benefit is that you have put your best offer forward, but unlike when you place a best and final bid, your final offer price is also based on other buyer's bids. This means you are not blindly bidding which can help you avoid overpaying.
If you have fallen in love with a home that you know is priced below market value, the sellers strategy may be to get into a bidding war and drive the price of the home up. If you love the home but don't want to get into a bidding war, ask your real estate agent about an escalation clause. They can help you determine if it is right in your situation and put together an offer that includes this type of clause.Share