In a competitive real estate market, buyers have one tool that can make their offer stand out: The escalation clause.
An escalation clause automates bidding on a property by automatically increasing the bid as competing offers arise. The buyer sets the incremental increase and a maximum purchase price.
There are three key components to an escalation clause:
– The initial offer or starting bid.
– The incremental bid, or the amount the buyer is willing to outbid any competitor.
– The cap, or the maximum amount the buyer is willing to pay.
Here is how it might work in practice:
Buyer 1 offers $300,000 and has an escalation clause that will hike the bid by $2,000 over a higher offer up to $310,000. So, along comes Buyer 2. Buyer 2 offers $303,000 and Buyer 1's escalation clause automatically increases the bid to $305,000. Just about then, Buyer 3 appears and bids $311,000. Buyer 1 has a cap of $310,000, so Buyer 3 has the highest bid.
This is one strategy appreciated by both buyers and sellers. It give buyers the advantage of staying ahead of the competition, while ensuring they don't overspend. Sellers like it because they can see the maximum sales price.
Of course, sellers will be interested in getting the maximum price, a temptation for dishonest actors. Most escalation clauses try to mitigate this danger by requiring proof and verification of competing offers.
The key is to work with a trusted, reputable buyer's agent who can help verify the process and advocate in the buyer's interest. A realistic maximum price also limits exposure to fraud.
