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    Let’s Talk Escalation Clauses

    !!! ATTENTION buyers !!! ATTENTION investors !!!

     Are you sick and tired of being outbid? Are you losing out on great investment opportunities at the last minute? Are you losing multiple homes you love? 

    This can be a very frustrating time in real estate if your real estate agent is not educating you on the different possibilities to stand out with your offer. It is not necessary to make a higher offer than you’d like to and pay it if you do not have to. There is a little trick where it is POSSIBLE to get the BEST price while still protecting you! 

    BUT, how is this possible? What is this trick? How can I stand out? 

    By using an escalation clause.

    But, what is an escalation clause? 

    Essentially, an escalation clause in real estate is a price escalation clause added to your official real estate offer. It informs the seller that you are prepared to AUTOMATICALLY outbid ANY other offers they receive with specific terms outlined on how you will do so. 

    Well, why do I want to use an escalation clause? 

    This gives you a greater level of control and success in securing the property you want! If you do not use one, the seller is likely to turn to the better offer and you will not be in the running at all. 

    Hmm, do escalation clauses really work?

    More often than not, the answer is YES. The reason an escalation clause can work in your favor as the buyer is because it can be written by a real estate agent in your offer contract to accommodate the YOUR EXACT wants! The escalation clause spells out EXACTLY how much you are willing to outbid the competitors that are bidding on the same property. It also protects you by putting a maximum amount or a cap on the purchase price you are willing to pay. 

    So- let us break it down:

    Let’s say you go to see a home in a HOT area in Western New York the day it hits the MLS and the offers are due 2 days later…because YES-that is reality right now in the market here. You make an offer of $400,000.00. Your real estate agent includes an escalation clause stating that you are willing to pay $5,000 above any competing offer, up to a maximum sales price of $450,000.00. If another buyer offers $420,000.00, you are automatically offering the seller $425,000.00, which ENSURES you get the house of your dreams! BUT, if another buyer offers $455,000.00, you lose the house, this is because in your escalation clause, your bid was maxed out at $450,000.00. Make sense?

    The Good and the Bad of escalation clauses:

    The Good/The positive side:

    -your offer stands out and is taken seriously because the seller and their agent know you are willing to compete and outbid others

    -you are automatically in the running to outbid other offers without just being left in the NO pile

    -it reduces bidding war, and decreases the back and forth because your best and final is right there

    -Your chances of buying the property you want increase

    The Bad/The ugly: 

    -the selling agent may not allow escalation clauses, your agent should check before submitting one and read the listing notes carefully

    -you are letting the selling agent know how much you are willing to pay, which kills any negotiations right up front 

    -you are locked into paying a higher price if other offers outbid you. Make sure you are comfortable paying the maximum amount written in the contract

    -the seller agent can unveil to other buyers your cap offer which allows them to know exactly what they need to outbid you

    SO, WITH ALL OF THAT BEING SAID-

     When would it be most beneficial or advisable for a buyer or investor to consider using an escalation clause?

    Consider using an escalation clause when you are: 

    -dealing with a hot seller’s market, which is RIGHT NOW in WNY! 

    -determined to purchase a particular property

    We have seen investors lose great properties to a competing bid, when they could have beat it out with an escalation clause. We have seen buyers unaware an escalation clause exists and lose their dream home. When you are dealing with a hot seller’s market like we are now, an escalation clause CAN make your offer much more competitive! Throughout the market right now, it is difficult for buyers to stand out from their competition without one. Throughout WNY, we are experiencing very low inventory, and properties are not staying on the market for very long when they are priced correctly. If a house is sitting on the market right now, it is NOT priced right. While cash propels your offer into the “taken seriously” pile, that is understandably not a possibility for everyone. An escalation clause is one more way to take your spot in the consideration pile! 

    HOLD ON A MINUTE- Let’s play devil’s advocate:

    Escalation clauses are NOT for everyone, and not for every situation- which is OK…being informed is KEY.  Escalation clauses can be good IF as a buyer or as an investor you are willing to go above and beyond your initial bid in order to SECURE that property! 

    Escalation clauses can be a straight up gamble…they can be detrimental to your position by putting all your cards on the table and in turn, losing the power to negotiate. The seller knows EXACTLY what you are willing to pay. 

    How do you know if an escalation clause is something you should use…

    -Ask your agent! 

    -Do you HAVE to HAVE this property?

    -Are there going to be multiple offers on this property?

    716 Realty Group agents are educated on how to make your offer stand out and all of the strategies that can be used to help navigate the current real estate market. Buy with us. Sell with us. Invest with us. Trust in us. 

    Written By:

    Michael Cipolla

    Licensed Real Estate Salesperson

    Amanda McNichol

    Licensed Real Estate Salesperson

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