In the current low inventory market, buyers for Virginia homes are doing whatever they can to make their offer more attractive to sellers. One tactic that is frequently used is the escalation clause.
What is an escalation clause? Simply, an escalation clause is an attempt by a buyer to guarantee that he will not be outbid on a property, up to the maximum stated amount. In practice the clause states that the offer will increase by a specified amount over the highest offer received.
Lets look at some examples:
- Buyer A offers to purchase a home for $400,000. If he especially wants the home, he may elect to include an escalation clause stating that he will increase his offer in increments of $5,000 over any other bona fide offer the seller should receive up to a maximum of $450,000.
- In the above situation, if Buyer B submits an offer of $425,000, since that is under Buyer A’s maximum, the escalation can be utilized increasing Buyer A’s purchase price to $430,000.
- However if Buyer B had made an offer of $450,000, or higher, the escalation would not be used since the offer is already over Buyer A’s maximum.
- In addition, if two offers both contain escalation clauses, they can escalate against each other, automatically increasing until one side is maxed out.
It is important to carefully consider exactly how an escalation clause is written. Most escalation clauses increase the Buyer’s offer against other net offers.
For instance, if a Buyer presents an offer for $400,000 and asks for $5,000 in closing costs, the offer is actually $395,000 for purpose of the escalation clause.
Most escalation clauses state that the offer will escalate over another bona fide offer and will ask for proof of such bona fide offer.
It is important to note that the Seller is not bound by the escalation clause. The Seller could counter back with the maximum price or whatever price he desires.
One more thing to consider is the appraisal. It is possible that the sale price may escalate higher than what the home will appraise for. As a result, the offer may be more appealing to the Seller, if the Buyer is able to make up the difference in cash. Otherwise the Seller will want to think about the
likelihood of the home appraising at the escalated price.
Whether you are a Buyer or a Seller, it is important to have a conversation about escalation clauses with your real estate agent early in the process.