What Is An Escalation Clause?

Escalation clause in real estate
An escalation clause may be used to make your offer more competitive.

To call the real estate market of the past few years a seller’s market might be considered an understatement. With many Americans looking to relocate to larger spaces while taking advantage of historically low mortgage interest rates, the real estate market has been on fire. Add in record low inventory levels and the result is a super competitive market for home buyers. With most homes receiving multiple offers within days, if not hours, bidding wars have become quite common. Although cash is typically king in bidding wars, one tool that many buyers have turned to is known as an “escalation clause”. We discuss what this is and how it is utilized below.

The escalation clause

In short, an escalation clause states that a home buyer will outbid other offers on a home by a certain amount of money up to a specified ceiling price. In this case, the ceiling price may also be considered the cap price or the maximum price that a buyer is willing to go to. The amount of money that a buyer is willing to pay above the next highest bidder is referred to as the escalator amount. To better illustrate an escalation clause, an example is as follows:

Example: A home is listed for sale at $500,000. Given the fact that the home is receiving multiple offers, you submit an offer above the asking price at $510,000 with an escalation clause stating that you will go higher than any other bona fide offer by $5,000 with a cap of $550,000. In the event that another offer came in at $520,000, your offer would be automatically bumped up to $525,000. If another offer were to come in at $560,000, then your offer would be capped at $550,000 per the escalation clause terms. At this point, the seller would need to review the terms of these highest offers to determine which is more appealing to move forward with. Keep in mind, the highest bid may not always result in the strongest offer. Many factors and contingencies will greatly impact the strength of an offer.

Summary

When submitting an escalation clause it is important to use an appropriate amount that will be the most appealing to a seller. For example, simply putting a $1,000 escalation amount may not be motivating to a seller to accept your bid over another offer with better terms. Depending on the sales price of the home, you will want to consider a more substantial amount in your escalator clause. Typically, we see amounts of $5,000 or more being used.

Given the current rising interest rate market, we are seeing buyer demand subsiding. As a result, we are even seeing more price reductions on active listings for sale. Therefore, we expect to see a more balanced housing market moving forward with inventory improving as well. Ultimately, it is expected that escalation clauses will be utilized less frequently over the next year or so. As always, all real estate is local though. It is important that you work with a local and knowledgeable real estate agent. Are you considering buying or selling real estate in South Florida? Contact Natasha at Live South Florida Realty, Inc. today!

At Live South Florida Realty, Inc. we have assisted many clients with their real estate needs. Are you looking to buy or sell a property in South Florida? Now more than ever, it is critical to have a qualified real estate team and the proper search tools behind you. Live South Florida Realty, Inc., has been a leader in the South Florida market for many years. Let our team of professionals assist you with buying or selling your piece of paradise today! In addition, our trusted “Florida Home Search” app is available on the Apple App Store and Google Play Store. With real-time MLS feeds, this app lets you set your own alerts to notify you as soon as a property meeting your needs hits the market. Furthermore, it will also let you know of recent closed sales in your area so that you may be even more educated on the market. Be sure to download this app for your smartphone or tablet today!

By natasha moore

REALTOR® with Live South Florida Realty, Inc.

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