Escalation Clause: A Helping Hand in Bidding WarsMon, October 21, 2013
Are homes for sale snapped up right and left in your targeted neighborhoods? That’s the case in some real estate markets today, and it often leads to that dreaded house hunting reality: bidding wars.
If you’re considering buying a house in an area where bidding wars are common, talk to your agent about including an escalation clause as part of your offer. It can become an important tool in a multiple-offer situation.
An escalation clause means that your offer is automatically increased by a certain amount in response to a competing buyer's higher bid, with a maximum offer price stated in the contract.
Here’s how it works: Let’s say you’re offering $120,000 on a house. In your escalation clause, you specify your bid can automatically go up by $2,000, for example, with a maximum offer of $135,000. When another buyer bids $122,000, your lower offer doesn’t lose out right away, because the clause automatically escalates it to $124,000.
There are some important considerations to make regarding escalation clauses. Your real estate agent might advise against it based on the homebuying climate in your local market; it might be that some sellers won’t consider an offer that contains the clause. On the other hand, your agent might see it as the leg up you need in your area.
Also, you’ll need to ensure your mortgage pre-approval amount allows for those increases – and you can afford the higher monthly payments that come with approaching your maximum buying power. It’s smart to talk it over with your agent and run your plans by your lender before deciding to use an escalation clause.
The point: Low inventory and bidding wars don't have to discourage you from making an offer on that dream home. You have options. Find a local RE/MAX agent who can discuss all of them with you.