Understanding An Escalation Clause In Real Estate | Highland Beach Real Estate

what is an escalation clause in real estate

An escalation clause is a contractual stipulation that enhances or otherwise changes depending on counteroffers from differing parties. It defines certain conditions that, when met, allow the outstanding offer to be elevated to a certain stated amount. In real estate, escalation clauses are one of the best ways to ensure you get the slice of Highland Beach Real Estate you're pining for, strengthening your offer and showing your prospective seller you mean business. In today's blog, learn the ins and outs of a real estate escalation clause and whether you should consider adding one to your next offer.

what is an escalation clause?

What Is An Escalation Clause?

Partially defined above, an escalation clause in real estate often means you are willing to match any competing offer to a certain stated price. This ensures that you stay in the running for the home in absentia, with your offer doing the work for you. In theory, the concept of an escalation clause is simple, but in practice requires greater attention to detail and includes several key components. The most basic understanding of an escalation clause is "I will pay for this property, but if another offer (Y) is higher than mine, I will increase to match that price.

common parts of an escalation clause

Common Parts Of An Escalation Clause

A properly written escalation clause is composed of a few elements. First is the buyer's initial offer. Next, is the escalation cap. The cap is the highest possible value you're willing to offer. Between your initial bid and the highest number is where your escalation kicks in. For instance, if you offer $500,000 on a home with an escalation clause capping at $515,000, your agent could set your escalation to exceed the competing offer by $2,000. What this means, is that if another buyer offers $503,000, your offer immediately extends to $505,000 until it hits the cap. If another buyer exceeds your cap, your escalation clause is no longer viable and must be changed or ignored altogether.

old fashioned alarm clock indicating the right time to use the escalation clause

When Is A Good Time To Include An Escalation Clause?

An escalation clause is an apt inclusion during a hot market when you have the financial flexibility to accept higher costs than you want to initially pay. If you've already maxed out budgetarily, an escalation clause is a financially harmful addition to your contract. Home sellers favor an escalation clause for several reasons. Firstly, it shows you're serious and can afford the home. Secondly, it shows the seller a higher potential number down the line, and lastly, it streamlines the paperwork in the event an offer within your escalation clause window is accepted. Rather than submitting an entirely new offer, an escalation clause is built-in for simplicity, among other reasons.

when is it a bad time to use the escalation clause?

When Is A Bad Time?

There are several indicators that you should watch for before including an escalation clause in your offer. First is your financial flexibility. If you're maximizing your existing budget, adding money you don't have is a terrible way to begin your life as a Highland Beach homeowner. In addition, as the market has slowed following the highest interest rates in decades, you may not find yourself in a fierce bidding war like in the past few years. Offering an escalation clause in a climate where it is unnecessary will simply pit you against yourself, and provide the seller with an incentive to look for higher bids in other places. 

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