Will an Escalation Clause Help Me Win A House Bid?
It can be frustrating bidding on the home of your dreams only to be outbid by someone with a better offer. If you’ve been bidding on homes with no success, you may be searching for a solution that will guarantee you win your next bid.
One such solution is what’s known as an “escalation clause.” While including an escalation clause in your bid could improve your chances of securing your next home, there are pros and cons to using one. Here’s what you need to know.
What is an Escalation Clause?
When you submit a purchase offer for a home, you can include an escalation clause in the language of your bid to ensure you are the highest bidder, even if someone makes a more generous offer than your initial one.
An escalation clause simply states that you will pay a certain amount of money above the highest offer that the seller receives from other bidders. However, escalation clauses usually include a cap to ensure you don’t end up paying more than you can afford.
For example, a seller might receive bids on their home for $490,000, $495,000, and $500,000. If you then send them a bid that includes an escalation clause stating that you’ll pay $1,000 more than the highest bidder with a cap at $515,000, then you’ll end up with a bid for $501,000.
But if a fifth bidder makes a bid for $510,000, your escalation clause puts you at a bid for $511,000. If a sixth bidder makes a bid for $515,000, then escalating your bid would put you above your cap.
What an Escalation Clause Means for the Seller
Sellers can only take advantage of an escalation clause if another bidder bids higher than your original offer. They can’t simply ask for a higher price arbitrarily. Furthermore, an escalation clause means the seller can no longer issue counteroffers to other bidders, which could result in them losing potential value on their sale.
For this reason, some sellers may not agree to a bid with an escalation clause, especially if they think they can secure a price from another bidder that is above the clause’s cap.
That said, some sellers may be open to an escalation clause in your bid if they are through negotiating with other bidders and they think it could help them secure a better price for the home.
Benefits of an Escalation Clause for the Buyer
An escalation clause can make your offer more attractive in some instances. It can also be beneficial to you if you’re tired of waiting for a winning bid. Even if someone bids higher than your original offer, you can automatically win the bid on a house because of the escalation clause.
Drawbacks of an Escalation Clause for the Buyer
Nonetheless, there are some drawbacks to including an escalation clause in your bid.
For one, you’re essentially telling the seller how much you think their property is worth by including a cap in your escalation clause. If they know you’re willing to buy their property at a high rate, they might decide to abandon the original listing price and start over at a higher price.
If you decide not to include a cap, you have a better chance of having the highest bid, but this also comes with risks.
You could end up paying much more for the property than you’d like. Sellers might not take your bid seriously either, as the absence of a cap amounts to you saying, “I’ll pay whatever price is higher than other bidders, but I reserve my right to refuse when the time comes to close the deal.” Sellers want to avoid the risk of turning down other bidders only to find out that their top bidder refuses to go along with the sale.
Consult with a Specialist Before Adding an Escalation Clause
An escalation clause can be a powerful tool when bidding on homes, but only in certain circumstances. It has pros and cons for both buyers and sellers. It’s also important to get the language of the clause exactly right to avoid any confusion or unintended consequences.
For this reason, it’s highly recommended that you speak with a homebuying specialist before including an escalation clause in your bid. Contact us at GoldCoast Mortgage to learn more about how you can win your next bid on a home.