Escalation Clauses
With property shortages, greater demand and rising prices, in some real estate markets competition for homes is so high, realtors and buyers are adding escalation clauses to sales contracts. What is an escalation clause?
In a contract for sale an escalation clause stipulates that, after the prospective buyer makes his/her offer on a particular property, they are willing to increase their offer by a specified dollar amount if the seller receives a more attractive offer. This only applies until the contract for sale is ratified by all parties.
Here’s the way it works: a seller places his home on the market for $400,000 and a prospective buyer makes an offer of $400,000. Buyer A is the first to make a full price offer on the property and the seller is entertaining the offer. Along comes Buyer B, knowing that another offer is already out there, Buyer B offers $410,000. Since Buyer A included a $25,000 escalation clause in his contract offer, the seller knows that Buyer A will match Buyer B’s offer up to the $25,000 limit. In order for Buyer A to commit to the higher price, the seller must provide proof that the higher offer was formally made. Once an offer has been accepted by the seller, and the contract has been ratified by all parties, the price is fixed even if another higher offer is made later.
The purpose of an escalation clause is to ensure that a prospective buyer who gets his bid in first is able to maintain his advantage even if another, higher offer comes in later. In areas where there is a shortage of property available and/or people are on very tight schedules for moving/relocating, an escalation clause can mean the difference between having a house to buy or being forced to rent an apartment.
Job transfers and/or changes can create many logistical problems for buyers in any circumstances, add to that a short supply of available houses, many families find themselves facing living in smaller quarters with the majority of their possessions in storage. Utilizing an escalation clause can help a prospective buyer have confidence that s/he can get the contract before s/he is outbid by another buyer.
October 18th, 2005 at 6:16 pm
Escalation clauses are also used in those situations where the seller will entertain all offers at one particular time. If you are a seller, be careful where you are entertaining multiple offers, each of which contains an escalation clause. If you do not understand the subtle distinctions that may exist between the escalation clauses, you may end up losing the benefit of those clauses and end up selling for less than the optimum price. If you’re a buyer, be aware that, by including an escalation clause, you are telling the seller the maximum price you are willing to pay. Don’t be surprised if the seller comes back with a counteroffer for that maximum amount!