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  • Using an Escalation Clause in a Real Estate Contract

    Real estate market across the country are red hot! In real estate circles we like to call this a seller's market. In fact, in some of the best areas it is not uncommon at all for the best homes to get multiple offers. Bidding wars are becoming the norm not the exception. Some buyers feel like they are getting squeezed out of the market as they make repeated attempts to purchase a home only ot lost out to other buyers.

    Buyers often ask real estate agents if there is anything that can be done to increase the odds of their offer getting accepted. There is and it is called an escalation clause. When this brought up many buyers look at you with a puzzled look. You know they are thinking tell me more. It is important that more real estate agents, buyers and sellers understand how an escalation clause works. Unfortunately many do not which leads to confusion and lack of confidence in using one. In my latest article published at Maximum Real Estate Exposure I have taken the time to write an in-depth explanation of what an escalation clause is and how one can be used correctly. You will learn some of the best tips for using an escalator.

    Here is a quick recap of some of the basics you need to know about an escalation clause:
    • They are used when you are competing against others in a multiple bid situation.
    • An escalation clause allows the buyer to increase their offer to a set amount over the next highest bidder.
    • The "escalator is how much over the next highest offer you will pay.
    • The "cap price" is the most you will be willing to pay for the property.

    Here is an example of how an escalation clause works. A home is listed for $600,000. As a buyer you really want the home. You already know there are multiple bidders many of which will probably offer over the asking price.

    You make an offer for $615,000 with an escalation clause that says you will pay $5000 over the next highest bidder with a cap of $640,000. What this means is if another buyer is willing to pay $625,000 your bid would be increased to $630,000. You would be paying less than your max of $640,000. The seller is happy because they are selling for 30,000 over asking. You are happy because you didn't pay your max of $640,000.

    What buyers needs to understand is that the price paid for the home is just one term although an important one. It doesn't mean you will automatically win the bidding war if other buyers have terms that are more attractive to the seller.

    For example maybe another buyer is willing to pay cash or waive a home inspection. Always find out what is important to the seller. This is where a great buyer's agent comes in handy.

    Take a look at the above reference to learn all you need to know how to take advantage of an escalation clause in your offer.

  • #2
    Actually in most states that will not work. Here is why. To actually do an escalation clause it would require releasing info on another offer. Unless you have written permission to disclose the other offer from all parties to that contract one can't release it.
    Alan Plager
    Berkshire Hathaway HomeServices
    Top Ten for units US 2015
    Over 6,000 Units Sold
    Toll Free 1-888-722-2098
    Office 727- 451-8776
    Email Alan@LoveTampabay.com
    Web AlanPlager.com

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    • #3
      Your comment is completely wrong. Disclosure of offers to anyone is absolutely fine as long as you have the sellers permission to do so. If it's in the sellers best interest to do so they should! A buyer's offer is not protected information.

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      • #4
        Hi,
        Good information and must read for real estate professionals.
        I learned a lot of new things from here.
        Thanks!!

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