Your Real Estate Contract Has an Escalation Clause. What Is This?
Property bidding can be a stressful endeavor. Not only is an offer needed, but you must be prepared to handle a potential bidding war, as well. But what happens if you are outbid by another buyer? If you are dead-set on getting the home, an escalation clause might be worth your while.
The following article will explain what an escalation clause is, and when one should be used.
ABOUT ESCALATION CLAUSES
Escalation clauses keep you protected in the event that a bid higher than yours is made by another buyer. You can add a clause in your contract that states that you would bid on a certain amount, but if you’re outbid, then you’ll increase the bid by a specific amount.
As simple as this sounds, the details must first be worked out.
THE ESCALATION CLAUSE PROCESS
Important details need to be included in the escalation clause. To begin with, you need to determine the amount your bid will increase by. For instance, if your bid is $150,000, and are willing to pay as much as $25,000 more than that in increments, you need to select to specify this in the clause.
If $2000 increments are what you opt for, and if someone’s bid for a home you want is $160,000, then your clause should state that you are willing to bid $2000 more than whatever the high bid currently is (or, specifically, $162,000). However, if a buyer’s bid is $176,000, you won’t win the bid. You won’t be a participant in the auction any longer.
ARE ESCALATION CLAUSES WORTHWHILE?
As great as escalation clauses may sound, they’re not always a practical idea. Sure, the interest of your bid is protected. You desire the home and have decided to put your money out there to get it.
Speak with your real estate agent first, though. What kind of market will you be making a bid in? Is the market more lenient towards a seller or a buyer? If the answer is the latter, you’ll have an assortment of homes to pick from due to low demand. It probably won’t be necessary to raise your bid.
An escalation clause informs sellers that your bid wasn’t enough. The seller could potentially counter the offer you make, expecting a higher payment out of you. After all, there is no reason for a seller to settle for anything less.
If the market is more lenient towards a seller, though, a higher demand will be evident, letting sellers choose who they want to sell their home to. In such cases, bidding wars may ensue. With an escalation clause, you won’t have to worry about counteroffers or the stress they bring.
With that said, not all sellers are fond of escalation clauses. Some prefer to go through bidding wars, because that’s where they would make the highest profit. Endeavor to feel out a seller to determine which direction they are swinging in before adding any clauses to a contract. Some sellers might be offended if your contract contains a clause.
HOW DOES THE SELLER HANDLE BIDS?
Sellers have choices to make when the market is in their favor, particularly with regards to bid acceptance. They generally use one of the following two methods:
• Back-and-forth: some sellers are more inclined to go through bids using traditional approaches. They accept bids individually. Sellers can either turn down the offer or send a counteroffer. They could also hold out for another week to see if other bids come in, which can frustrate buyers. When this happens, an escalation clause is useless. You would be better suited to make a real-time counteroffer if a seller counters your initial bid.
• One-time review: other sellers evaluate every bid that comes in at once. Bids that go back-and-forth are not something they’re interested in. They would prefer to establish a certain date, evaluate each contract at once, and pick the best one of the lot. An escalation clause is helpful in such scenarios, since your odds are better of issuing the highest bid.
In certain situations, escalation clauses can prove useful. Speak with your real estate agent to find out if it’s a worthwhile endeavor for you based on the market and your personal situation. Real estate agents can inform sellers when the right time is to consider escalation clauses, and when they might come across as offensive (resulting in declined offers). Take your real estate agent’s advice into consideration – as well as your gut instinct – and determine how you want to move forward.