Including an escalation clause in your home purchase bid can help you win a bidding war, especially in a case where the size of the offer is a significant factor (which is true in many cases). An escalation clause allows your real estate agent to increase your bidding price automatically, up to a predetermined limit, without further input from you.
Basic Components
The exact wording of escalation clauses varies by market, but there are a few basic components that are common across different regions. Below are some of these basic components.
Initial Offer
Just like any other home purchase offer, you must include how much you are willing to pay for the house before the price is escalated. This is the price for which you will buy the house if there is no offer greater than yours and the seller accepts your bid. For example, if your initial offer is $275,000, then this is the amount you will pay if the seller doesn't receive a better offer and decides to accept your offer.
Increments
You also need to include how much you are willing to pay above a competing bid; this is the increment. For example, if you include a $3,000 increment, then it means you are willing to exceed a competing bid by that amount. Thus, if you bid $275,000 and another person bids $280,000, your bid automatically increases to $283,000.
If the other person increases their bid (or another party submits another bid), your bid automatically rises by $3,000 above the highest bid. This continues until you win the bid or you reach your maximum bid, which is explained below.
Maximum Offer
The maximum offer is the maximum money you are willing to pay for the house without regard to how much others might bid for it. For example, you can make an initial offer of $275,000 with an increment of $3,000 and a maximum offer of $290,000. In this case, it means your initial offer will automatically increase until it hits, after which you stop bidding whether or not your offer is the highest.
When to Include the Clause
An escalation clause is not mandatory in all property purchase offers. In fact, there are cases where you can't include the clause in your purchase bid.
No Exclusion
Some sellers don't want to deal with the hustle of escalation clauses. They want every potential buyer to submit their highest offer the first time. This makes it easy for sellers to compare competing bids.
Competing Bids
It only makes sense to include an escalation clause if there are competing bids. Maybe the house is in a desirable neighborhood, has unique features, or is competitively priced. However, the clause makes no sense in a case where a house has been sitting in the market for a long time and your bid is the only one.
Sellers' Market
Lastly, even if there are no competing bids at the moment, you should include an escalation clause when looking for a house in a sellers' market. In such a market, the seller might receive a better offer after receiving your offer. Thus, it makes sense to protect yourself with an escalation clause from the beginning.
For more information on buying properties for sale, contact a real estate agent.
