Even if you feel like you have offered the best price for the house you want, there’s always a chance that the seller is receiving even better offers — especially in a hot market like Seattle where the demand is high and supply is only just starting to catch up.
This is where escalation clauses come into play.
[Related: The Best Times to Buy a House in Seattle]
What Is an Escalation Clause?
An escalation clause, sometimes referred to simply as an escalator, is a real estate contract signed by the buyer that lets the seller know that they’re willing to increase their offer if the seller gets a higher bid than theirs.
The basic components of an escalation clause are:
- Original offer price
- Increments the offer will increase in case of a higher bid
- Maximum offer you’re willing to put down
For example: You see a home you want to purchase, so you offer the seller X under an escalation clause. This means you’re planning on paying X, unless the seller receives a higher offer. Under the escalation clause, if the seller receives a higher offer, your initial offer can increase to Y price (or Y amount over the competitive bid) up to Z final offer.
[Related: Seven Reasons Why Homes in Hot Markets Don’t Sell Right Away]
Do All Sellers Accept Escalation Clauses?
Not all sellers will accept escalation clauses. It’s easy to see why many sellers want each buyer to submit exactly what they’re willing to pay. Saying that you can pay more but aren’t may be seen as low-balling to some homesellers.
On the other hand, sellers sometimes are okay with escalation clauses, since it could encourage a bidding war, especially if the starting price is lower than the home is worth.
[Related: Five Priceless Reasons to Save Up to Buy a Home vs. Renting]
When Should You Use an Escalation Clause?
Escalation clauses should be used only if the buyer is confident that the seller will be receiving multiple offers, and could be a good idea if you think the home is underpriced compared to similar properties in the area.
Understand that by using an escalation clause, you’re placing all your cards on the table, and the seller will be able to see your limits when it comes to securing the home. If no one else submits a bid, now that the realtor knows you are willing to go higher, they could counteroffer at a higher price.
With an escalation clause, the buyer gives up a lot of traditional negotiating power.
[Related: Tips for Budgeting on How Much Home You Can Afford]
Impact on the Seller’s Offer-Review Process
If you are bidding in a hot market, a seller might be doing a multiple-round offer and review process. This is where a seller collects all offers one week and comes back and asks the best of those offers to come back with their highest maximum bid.
In this instance, if a buyer started out with an initial escalation clause, the seller and their realtor can legally reveal their maximum offer as “the bid to beat” to the competition. This is not great news for you, especially if your financial cap on your escalation clause is actually the most you can afford.
Your realtor should be researching the circumstances around the seller’s process and practices for reviewing their offers. A good realtor should be familiar with the different practices and probable outcomes in the market in order to help you determine if an escalation clause is appropriate or not.
If it turns out that the realtor does a multiple-round offer review process, you might not want to show your hand.
[Related: Can I Afford to Buy a Home in Seattle?]
Be Clear in Your Escalation Clause Language
Make sure your escalation clause statement contains clear language that doesn’t allow for any miscommunication or convolution.
For example, using a term such as “bona fide offer” instead of just “offer” can stress the importance of offer escalation only in response to legitimate, enforceable offers from other potential buyers. This protects the buyer from the seller taking advantage of the escalation clause’s maximum offer without an actual reason.
Be Realistic With Your Maximum Offer
If you’re going to do an escalation clause, be realistic and make sure your maximum price is one that you are comfortable with actually paying. While at the same time, in a hot market, aggressive bidding and competition is what might be necessary in order to win the home that you want.
Escalation clauses — in addition to things like earnest money deposits, letters to the seller, and real estate contingencies — can help you stand out among the competition when it comes to bidding for the property you want.
[Related: Make Sure You Have These Supporting Documents for Loan Approval]
Seattle Mortgage Planners Can Help
If you’re looking for more assistance in your homebuying journey, the experts at Seattle Mortgage Planners can help. Whether you’re a first-time homebuyer or an experienced homeowner, we’re with you every step of the way.
Contact us today and let us guide you through the homebuying journey.
