When and How to Use an Escalation Clause in a Multiple Bid Situation

When and How to Use an Escalation Clause in a Multiple Bid Situation (Source: pexels.com - used as a royalty free image)
The Chicago real estate market is no stranger to competitive buying and bidding wars. With an active market, multiple offers are commonplace and buyers are beginning to seek an extra edge for their offers.

We have spoken previously about tactics for winning a multiple bid situation. Many times, however, it really does come down to the final price. That is to say that what you're willing to pay vs. what the competitive buyer is willing to pay, will largely determine which offer the sellers will go with.

It is in cases like this that an escalation clause may work in your favor. With our thanks to Realtor.com, here is some helpful information to know about escalation clauses - what they are, why they happen, and what the outcome might be for you: 

What is an escalation clause?

An escalation cause is essentially an "if, then" statement, allowing a buyer to say: "I will pay x price for the home, but if the seller receives another offer that is higher than this, I will increase my offer to y price." Simple, on the surface, but it does get a bit more complicated in the details of the transaction.

Here are its three basic components:

  • Original offer of purchase price
  • Escalated price above any other competitive bid
  • Maximum amount the purchase price will reach

Here's an example! Say Buyer Joe offers $150,000 for the home. The realtor adds an escalation cause that, if there is a higher competing offer, Buyer Joe's offer will increase in an increment of $2,000 above the competing offer. However, Joe's offer will not exceed $165,000.

No other offers submitted? The offer remains at $150,000. If another offer comes in at $155,000, Buyer Joe's offer increases to $157,000. If another offer comes in at $166,000, Buyer Joe's maximum will be eclipsed and so the other offer will likely win the day.

Will my escalation clause be accepted by all sellers?

There are some cases where home sellers will plainly state that they will not accept an escalation clause, opting to have buyers submit precisely what they are willing to pay. For sellers, this streamlines paperwork and the decision-making process, while also motivating buyers to start with a highly competitive number.

Is there a downside to escalation clauses?

If there end up being no other offers, then technically your offer stands, at your original, lower price. However, the listing agent and seller now know that they can counteroffer you at a higher, more escalated price than they may have done previously, as they know you are clearly willing to pay more. In this type of scenario, you end up losing key negotiating power and, potentially, some valuable money.

The bottom line? Approach escalation clauses with caution

There are some times when you may know for certain that an escalation clause will or won't be a good tactic to use.

When a seller's agent clearly states a one-day review, for example, and you expect to be competing with a large number of other offers, your escalating terms may seem too complicated to be considered amongst a sea of other numbers, and so your negotiating power will not have an opportunity to play out.

Always have your real estate team inquire on the details of the situation to ensure you're best equipped to make an offer (and, of course, make the decision to add an escalation clause). It is the job of your realtor to acquire as much knowledge as possible from the situation, and advise you on whether or not your offer is likely to succeed, with or without any additional clauses.

Remember to be realistic, be entirely comfortable with the maximum you're willing to offer, and approach the situation with confidence. Pursue your ideal home with tactful aggression while prices and mortgage rates remain low

Have questions? Need guidance? We'd love to hear from you! Send us an email or give us a call today.

 

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