When you are buying a home there is always the potential for a multiple offer situation to occur. This basically means more than one person is bidding on the home at the same time. In these types of situations it’s not uncommon for home buyers to use what is known as an escalation clause.
What’s the Purpose?
The purpose of an escalation clause is to try to eliminate as much competition as possible. Basically, the clause would state the buyer will pay a certain amount above the highest bidder. This amount can be anywhere between $100 all the way up to hundreds of thousands. To ensure the buyer doesn't go over their budget, there is usually a ceiling cap included.
Here is how a typical escalation clause might read. Buyer agrees to pay $5,000 more than the highest bid received by the seller. However, the total sales price cannot exceed $400,000. If there is a chance for other buyers to significantly raise the price of the home, be sure to include a ceiling cap.
For sellers an escalation clause is often looked at as a bad thing. Anytime there is an escalation clause in play, the seller will no longer be able to provide counter offers to other interested parties. In essence, the seller stands to lose money.
For the buyer, an escalation clause can actually increase the chances of their offer being accepted. If you are the type of buyer who doesn't enjoy the suspense and tension that comes along with multiple offer situations, consider using an escalation clause. You will be able to set your own parameters and define how much you are willing to pay.
Please know escalation clauses aren't legal in every state. However, some agents will still suggest it to buyers. It may be better to just make your highest and best offer from the beginning. If it’s not accepting you can move on to something else.
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