Escalation Clauses in a Real Estate Market
What is an Escalation Clause and how do they work? Escalation clauses in the Huntsville real estate market are becoming more commonplace. I’ve been a full-time Realtor since 1997. This past year marks a first for experiencing an escalation clause. This tells us one thing…inventory is at an all-time LOW.
What is an escalation clause?
When you have found a home that you are ready to write an offer on, if there are multiple offers, the situation may call for an escalation clause. An escalation clause could contain “My offer price is “X”, but if the seller receives a higher offer, I’m willing to escalate my offer to “X+”.
An escalation clause can bring with it stress for the purchasers. While it may seem overwhelming and a bit confusing, it’s pretty straightforward. Be realistic and be responsible with your offer. Don’t let emotions tempt you to overpay for a home that you know you won’t live in for many, many years. Overpaying now could cause hardship later.
What are the Risks?
There are risks involved with escalation clauses. A buyer will be giving up most of their negotiating power. They are laying their cards on the table. You won’t get to use your poker face this time. Here are a few things we are seeing on contracts with escalation clauses:
- The home may not appraise and in multiple offer situations, many sellers are striking buyers appraisal contingencies.
- This means you will bring more money to the closing table and could be paying more than an appraiser values the worth of the home.
- Buyers may be willing to strike their right to a home inspection or purchase as-is.
- Buyers are not asking for closing costs.
When to use an Escalation Clause
Escalation clauses should only be used when the buyer is confident that there will be multiple offers. A listing agent does not have to advise the buyer’s agent that there will be multiple offers unless they are asked. If asked, the listing agent is required to disclose a multiple offer situation.
Buyer and Seller Tips
We’ve seen escalation clauses in the Huntsville real estate market range from $100 over the highest offer to over $20,000. And for the record, the $20,000 escalation offer didn’t win the highest offer. Our @ Homes Realty Group agents have experienced multiple escalation clauses on the same house, many times!
We advise our sellers to carefully weigh all offers and make a decision based on what they will NET to the seller, not the overall offer price. Keep that in mind when making offers. Are you asking for closing costs, several inspections, an extended close, etc? All of these factors could push the seller towards another offer.
Keep in mind that not all homes will command multiple offers and each situation is unique. Listen to your agent who is best to advise you on a particular home. Ensure your agent understands the LOCAL market and absorption rates!
Remember: If the inventory is low and you are likely competing with other buyers. You may need to be aggressive in your offer. If you are only looking for a deal in a hot price range and location, you may not end up being a buyer at all.
If you’d like more details on the risks/rewards of escalation clauses, we’d love to sit down with you and share our extensive knowledge! Feel free to reach out to us at 256-425-1659 or [email protected]
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