What is an escalation clause? Here is a cliff notes version

Escalation clauses are all the rage in real estate these days. Buyer agents are including them in more and more offers as a way to give their clients an opportunity to compete for a property.

So what are escalation clauses? Simply put, an escalation clause is the buyer telling the seller that they will pay a certain price for their home but if the seller gets a higher offer, the buyer will increase their offer up to a certain amount.

When it comes to escalation clauses, there are three questions to ask when considering an escalation addendum.

1. What is the original offer to purchase price?

2. How much will that price be escalated above any other competitive bid?

3. What is the maximum amount that the purchase price can reach in case of multiple offers?

It is important to note, that some sellers may tell buyers and their agents that they are not accepting an escalation clause in their offer. They are only accepting taking the highest and best offers. Given the current state of the market, sellers have the advantage so they can dictate terms.

Escalation clauses have become standard procedure in this multi offer market. You could potentially end up winning a bidding war for a property by incorporating an escalation clause in your offer but it is not guaranteed.

Adding an escalation clause in your offer also depends on your finances. You can increase your offer, but keep in mind. You cannot go up to or over your pre-approval if you intend to finance closing costs. Putting in an escalation clause is not an option if you cannot come up with additional funds to increase your offer. The selling agent could request to speak to your loan officer to make sure you can come up with additional funds if you get into a bidding war.

Escalation clauses make sense but make sure you are in a position to put it in an offer otherwise it is not an option.

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