Some people might think the process of buying a home is as simple as finding the house you want and writing a good offer; however, as a buyer in a seller’s market, nothing is simple. Instead, things are often intense and multiple offer situations are common. Growing weary and frustrated, buyers and their agents have long looked for a way to stand out in the crowd during those multiple offer situations. One alternative that some agents employ is the use of an escalation clause. These optional clauses are inserted into real estate offers and might offer a buyer an advantage but there’s a lot more to these tiny clauses than meets the eye.
What To Know Before You Use An Escalation Clause In Real Estate
What Is An Escalation Clause?
An escalation clause, or escalator clause, is a method that allows the offer price to increase in desired increments. The purpose of using an escalation clause is to beat the other offers without overpaying for the property. The buyer’s offer is for a specified purchase price; however, an included escalation clause could increase the purchase price.
How Does An Escalation Clause Work?
If a home is listed for $200,000, a buyer can make an offer for $200,000. If they want to beat out any other offers, they might choose to include an escalation clause up to $10,000 over their offer price. These escalation clauses usually specify the increased increment amount and the cap in which they stop increasing their offer amount. For the $200,000 example, they may include a $2,000 incremental offer increase over the highest existing offer up to $210,000. In order for an escalation clause to be included, it must be specific & clearly state the cap amount a buyer is willing to pay and the amount of the incremental increase.
What Should You Do Before Including An Escalation Clause?
First and foremost, if you are using a buyer’s agent to assist you in making the offer, it’s important they research if escalation clauses are even allowed by the state or local board. While some state or local Realtor associations still permit escalation clauses and even provide a separate document for them, not all provide that document. The issue of illegal practice of law has been brought up in association with escalation clauses, so a buyer and their Realtor might want to consult an attorney to draft the clause to avoid the legal risk. Finally, while it may be tempting to not offer more than you must by using incremental increases in escalation clauses, it does not always work in the best interest of buyers. Be cautious before you include an escalation clause in your next offer!
Why Aren’t Escalation Clauses More Common?
There are various reasons that using an escalation clause in an offer is risky business. While it may appear to be a smart way to win a bidding war, it reveals the max a buyer is willing to pay- much like showing your cards before you have to play them. There are also several legal issues surrounding escalation clauses. In fact, those gray legal areas have caused many local and state Realtor boards to ban the use of escalation clauses. Some of the gray legal areas surrounding escalation clauses include privacy issues, illegal practice of law, and ethical issues. The risk for a buyer using an escalation clause is that they may want proof that other offers exist that are higher than their original offer and therefore activating the escalation clause; however, the privacy and legal issues surrounding a buyer knowing the specifics of other buyers’ offers is an area of concern. According to Forbes Magazine, some sellers may choose not to accept an escalation clause.