What is an Escalation Clause?

Everything that you NEED to know about Escalation Clauses.


What is an escalation clause? This clause could be the difference between you winning a multiple offer and not. It could also save you thousands of dollars. I explain...


SUMMARY: 

WHAT IS AN ESCALATION CLAUSE

  • An escalation clause is an addendum to the purchase and sale agreement that says you're offering "price x," but willing to PAY "price y" in increments of specified amounts. 
  • The best way to explain is through an example:
    • Offer 1: $750,000
    • Offer 2: $740,000 with an escalation up to $775,000 in increments of $2,500
    • So, who wins and at what price? Offer 2 wins the offer at $752,500.
  • Be careful about how much you're putting up in increments. If you go to low (like $1,000 increments), the seller may go to the other offer if it's close and has better terms. Make sure the increments convey that you WANT the property. Especially since you'll be competing when using this. 

WHEN TO USE AN ESCALATION CLAUSE

  • You only use this in multiple offer situations. 
  • The last thing you want to do is have an escalation clause and end up being the only offer. This essentially "shows all of your cards" to the sellers and gives you no leverage. 
  • Work closely with your agent.


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