We are going to start a series of quick blogs that will help define some of the confusing terms that are often thrown around in the real estate industry. The first topic we are going to tackle is “escalation clauses”.
An escalation clause can be used by a buyer that is making an offer on a property where they know it will be a very competitive offer situation. The concept here is that the buyer would start their offer with an initial offering price, and from there they can structure their offer to where they are informing the seller contractually that they will “beat the next highest offer” by using the escalation clause.
What is most common with this offer structure is that a buyer will state how much and in what increments they are willing to increase their offer price in the event there are competing offers with a higher price than theirs. Buyers will also establish a cap, or a maximum amount, that their offer will escalate to. The key to this process is that there are other offers that are higher and have similar terms to the buyer that has the offer with the escalation clause, and proof of that offer would have to be provided to the buyer.
Let’s draw out an example of how this would play out:
The buyer is making an offer with an escalation clause and their initial offering price is $100k.
They are willing to increase their offer by increments of $2k if there are other offers that are higher than $100k in order to beat the next highest offer by $2k.
Buyer establishes a cap to their offer and escalation clause of no higher than $120k.
Another offer is presented to the seller from a different buyer for $115k.
Buyers with the escalation clause would be positioned to beat the offer for $115k by $2k, so they would be agreeing to pay $117k. Proof of the competing offer for $115k is provided to the buyer with the escalation clause and the buyer and seller agree to a final price of $117k.
In the recent highly-competitive seller’s market, an escalation clause is a new approach that provides a benefit to both buyers and sellers and has been widely adopted by the real estate industry locally here in Rochester, NY, and nationally. There are more aspects to dive into with this concept but we wanted to get started with as simple of a definition as possible. Contact us directly if you have any questions about escalation clauses and stay tuned to our blog for more help understanding the real estate market!
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