Historically low interest rates coupled with a lower than average inventory of homes for sale has created a strong seller’s market. As a result, potential homebuyers often find themselves in the middle of a bidding war for the property they hope to own. This means homebuyers need to be fully aware and willing to rise to the challenge. One way in which potential buyers can win in a bidding competition is with the addition of the escalation clause to their contract.
As an addendum to the initial offer, the escalation clause automatically increases a buyer’s bid in predetermined increments when a competing bid is offered. Currently nearly one in five offers include escalation clauses which are extremely helpful given the current housing market trends. When using an escalation clause, as a buyer, you are showing you are willing to make your offer more attractive. This, in turn, also drives up the price. In many instances, the escalation clause can help you win the bidding war and so, your new home.
Developing a Strong Escalation Clause
The inclusion of an escalation clause allows you, the potential buyer to avoid being outbid on the home you have selected, up to your maximum bid. Your escalation clause should include three elements – your initial offer, your willingness to pay more, and your maximum bid which is the point at which you will stop bidding. The goal is to help you get the property you want, outbidding others with the escalation clause, up to a certain point, your maximum bid. In most cases, your escalation clause will have built in increments, either a specific amount or a certain percentage, which your bid will rise over the highest offer the seller has received.
For instance, Buyer X makes an offers of $200,000 for the home. In the offer, her real estate agent, adds an escalation clause increasing Buyer X’s offer in increments of $2,000 above any competing offer, up to a maximum of $212,000. If there are no other offers on the property, Buyer X’s offers remains $200,000. If Buyer Y submits and offer at $205,000, Buyer X’s offer increases automatically to $207,000. If Buyer Y then offers $213,000, Buyer X’s offer has been exceeded, leaving Buyer Y with the best offer on the home.
It is important when developing your escalation offer with your real estate agent that you don’t assume an increment of $1 or an equally miniscule amount will help you win the house. Since your escalation offer may meet more than one competing bid, it should be a worthwhile offer, that sellers are willing to accept.
Are Offers with Escalation Clauses Acceptable to Sellers?
Each seller and their circumstances are unique, which means sellers often have different terms which are significant to them, be it price, no contingencies, or a lightning fast closing. In fact, in some cases, a seller may be willing to accept an offer with an escalation clause but will counter with other terms important to the sale as well from his or her point of view. Some real estate agents urge sellers not to accept escalation clauses, believing they give buyers an unfair advantage, and prevent sellers from getting the highest possible price.
For example, if Buyer X offers a maximum price of $200,000 and Buyer B offers $200,000 with an escalation clause of $2,000 over the highest offer, up to $212,000, the Buyer B will win the bidding war with $202,000.
The Coastal Home Team Is Here to Guide You
Whether you are ready to buy and make the Space Coast your home or are hoping to sell at the highest price in the current seller’s market, the Coastal Home Team is ready to guide you successfully through the process. Call today and discover the expertise and trustworthy service provided by the Coastal Home Team.