What is an escalation in real estate? In a hot seller's market, escalation clauses are becoming more and more popular when writing offers.
So how do you leverage tools like this when you are making an offer on the home of your dreams?
How does it work?
Let’s break it down and see if an escalation is right for you!
What Is Escalation In Real Estate?
An escalation on an offer is ideal when a buyer is making an offer on a home that is expecting multiple offers.
An escalation means that you give the buyer your offer, with a clause on it stating that you’ll add a certain amount of money over the next highest offers. In essence, it’s a little bonus written on your offer that automatically increases your offer in small increments until you get to your highest bid, hopefully getting you the accepted offer.
But oftentimes, there are multiple escalations with multiple offers, making it confusing for the seller to comb through and choose the most desirable offer. Many of the escalations can even make the offers arrive at a similar price. So even if you do offer an escalation, make sure you tighten your offer even more by removing as many contingencies as you can. Make it clean and competitive and you will increase the chances of getting that home of your dreams!
How does an escalation work?
For example, you are making an offer on a home for 875,000. The buyer is asking 850,000, so you are above asking, but still not sure if your offer is strong enough. If your lender approves, you can add an escalation that you will raise your bid by $2,000 (or whatever your agent advises) over every high bid until you reach your maximum budget.
So if the other offers come in at 900,000, but your top offer is actually 910,000, you can raise your offer in a silent bid of increments to your highest and final offer.
Escalation Clause Bidding Wars
When the offers are all on the table, if yours isn’t the highest, but the others don’t have escalations on them, yours may end up outbidding the highest offer without having to go back and forth with counter-offers.
An escalation makes the process shorter since the counter offers are already written into the contract. If no higher bids are on the table, the escalation won’t kick in and you’ll still pay your original offer if accepted.
Is an escalation clause a bad idea?
It’s helpful to have extra tricks up your sleeve as a buyer in a seller's market, and an escalated offer can be a real asset when writing your bid. But there are some situations where an escalation is not recommended.
Some buyers prefer no escalations. They don’t want the back and forth, they just want the best and highest offer from each buyer. In these cases, it’s best to come in with your highest offer, being careful to not extend past your pre-approved budget.
If there are multiple rounds for offers, adding an escalation early in the process is not recommended. You don’t necessarily want to show all of your cards at step one. A seller will see your top offer and may eliminate you from considerations before you’ve even reached your maximum.
If the home you are bidding on is already at the top of your budget, don’t be tempted to add an escalation over and above what you are comfortable paying. The right house is out there for you, but pricing yourself into your dream home can come at a long-term cost if your payments prove to be unaffordable. You want to enjoy your home, not be a slave to the payments.
How do you write an escalation clause in real estate?
When purchasing a home in a seller's market, your most effective and valuable tool is going to be your agent. They will have all of the resources and understanding needed when you are writing the offer.
An escalation can give you an edge, but it can also hurt you when used at the wrong time. So sit down with a professional agent to discuss the best strategies for each home you make an offer on. Every situation is unique, so you’ll need an agent to navigate all of the twists and turns of a hot market.
Your agent may also have information from other agents, so they may know when you sit down to write the offer what you're up against. They will know if there are other offers coming in, and how to guide you with a plan that gives you the best chances without overextending yourself.
Things to think about when writing an offer with an escalation
To write the actual escalation clause, you’ll need to have three things in mind:
What will your offer be? When you look at a house, you’ll have the asking price in front of you, but what are you going to actually offer? This number is important because you want to be realistic about the market you are shopping in, but also get the best possible price for yourself that you can. It’s a tricky game, but your agent will help you navigate the process of finding your best offer.
What will your escalation increments be? Once you decide on your offer price, you’ll need to know what increments your escalation will follow. Again, this can vary from offer to offer, so talk to your agent to discover the best increments for the bidding war you are in.
What is your best and final bid? This number is really important. It’s the ceiling you put on your offer. It’s your best and final offer, as high as you are willing to go. You want to make sure you don’t offer above what the market can handle for the property, but you also want to make sure you have the best offer. So ask your agent to help you decide on a fair and reasonable final offer for your escalation.
Is escalation right for my offer?
An escalation clause isn’t foolproof. There are no guarantees that you’ll win a bidding war with one, but it can certainly be a valuable tool in a fast-paced market. Don’t ever feel pressured by an escalation and always know your numbers.
How to beat an escalation clause
Listen to your agent and be persistent in the hunt. The right home is out there for you. It’s oftentimes a mixture of timing, stamina, grit, and good luck with so many buyers fighting for a few homes.
Stay positive and enjoy the search!