Bidding on a home is stressful business. Not only do you need an offer, but you have to prepare yourself for a bidding war too. What if another buyer outbids you? If you really want the home, you may consider an escalation clause.
Keep reading to learn about the escalation clause and if/when you should use it.
What is an Escalation Clause?
The escalation clause protects you should another buyer make a higher bid than you. Your contract can include a clause that states, I bid ‘$X,’ but, if another buyer outbids me, I will increase my bid to ‘$Y.’
It sounds simple, but you must work out the details first.
How Does the Escalation Clause Work?
Your escalation clause must include important details. First, you must decide how much you’ll increase your bid. For example, if you bid $150,000, but will bid up to $175,000 if necessary, you must choose the incremental increase.
Let’s say you decide on $2,000 increments. If someone bids $160,000 for the home, your clause increases your bid to $162,000 or $2,000 over the highest bid. If another buyer bids $176,000, though, you lose the bid and are out of the running.
Is an Escalation Clause a Good Idea?
An escalation clause sounds perfect, right? You protect your bid’s interest. You know you want the home so you are willing to put it all out there upfront. But is that a good idea?
It’s not always a good idea. You may want to ask your realtor first. What type of market are you bidding in? Is it a buyer’s or seller’s market? If it’s a buyer’s market, you have your pick of homes because there’s little demand. Increasing your bid is probably unnecessary.
The escalation clause lets the seller know that you didn’t bid enough. He or she may immediately counter your offer, knowing that you’ll pay more. Why should the seller settle for less?
If it’s a seller’s market, though, there’s a large demand for homes and sellers have their pick of buyers. In this case, you may experience a bidding war. If you have an escalation clause, counter offers and its stress aren’t necessary.
However, some sellers don’t like escalation clauses. They would much rather see a bidding war – after all, sellers make the most when there’s a bidding war. Try to feel the seller out to see where they stand before automatically adding the clause to your contract. Sending a contract with the clause in place may offend some sellers.
How is the Seller Handling Bids?
In a seller’s market, sellers have options when taking bids. They typically offer one of two methods:
- One-time review – Some sellers review all bids on one day. They don’t want back-and-forth bidding. They’d rather set a specific date, look at all contracts at one time and choose a buyer. The escalation clause works well in this situation because you have a better chance of taking the high bid.
- Back-and-forth – Other sellers prefer the old-fashioned bidding method. They take bids one at a time. Sellers may counter an offer or flat out turn it down. They may also wait another week or so to see what else comes in. This can be frustrating for buyers. In this case, the escalation clause rarely does any good. You’d be better off sending a live counter offer should the seller counter your original bid.
The escalation clause has its time and place. Talk with your realtor to determine if it makes sense given the real estate market at the time as well as your situation. Realtors can tell when sellers may be open to the thought and when it may offend them, causing them to decline any offers. Using your realtor’s advice and your best judgment, you can decide what’s right.