Escalation clauses in Real Estate Contracts
By JESS BARRON, Lindsey’s Inc. Realtors
In an increasingly competitive real estate market, we are seeing more usage of escalation clauses in real estate offers and contracts.
An escalation clause, also known as an escalator, simply states that a buyer will pay a certain price for a property but will increase their offer to a certain amount if the seller receives an offer higher than the buyer’s initial offer.
For example, a buyer may offer $200,000 for a property, but be willing to increase their offer to $215,000 should the seller receive an offer higher than $200,000. This is a simple concept in theory, but it is more complex in practice.
You typically see an escalation clause written in the special stipulations of a purchase and sale agreement (PSA) or an exhibit to the PSA. Escalation clauses typically have increments and a maximum. For example, a buyer may offer $200,000 for a property and be willing to increase their offer by $5,000 above the highest offer on the table for the seller. So, if the seller receives another offer from another buyer for $205,000, the former offer/buyer with the escalation clause would go up to $210,000 and win the bidding, at least in theory. Escalation clauses can be good things and the difference between a buyer winning a bid on a home or losing out to another offer. They also can cause problems and cost buyers money if they are not written and executed correctly.
The problem with escalation clauses is that not every seller or seller’s agent will accept them. As a buyer’s agent, it is essential that you contact the seller’s agent to obtain as much information as you can so you can help your client secure the property they desire. A buyer needs to make sure that there are in fact multiple offers on the property. You should ask about the seller’s willingness to entertain escalation clauses. Some sellers will prefer that every interested party make their highest and best bid for the property, with no escalation clause. We see many sellers call for a deadline for everyone to submit their highest and best offers in multiple offer situations.
Another negative of escalation clauses, is that the buyer is essentially “showing their cards” in a negotiation. The buyer is telling the seller, in writing, what the maximum is that they are willing to pay for a property. This is a huge no-no in negotiating. Sometimes, the demand and need for a house is so high, the buyer does not care. It is important to try and not be emotional when you purchase real estate. Maintaining a level head and not overpaying for a property is very important. You will be glad you did when it comes time to sell the property later.
Jess Barron is an Associate Broker with Lindseys, Inc. Realtors and former President of the Newnan-Coweta Board of Realtors.