What Is An Escalation Clause And How Can I Use It

What Is An Escalation Clause And How Can I Use It

The Northern Colorado market is extremely competitive right now.  Many times, if you find a good deal, you will find yourself competing for the same property with other buyers in what's referred to as a "multiple offer situation".  One strategy you can use to avoid overpaying and still remain competitive is to use an "escalation clause".

You can't use an escalation clause in all situations.  Foreclosures often don't allow them and sometimes sellers don't like them.  So be aware of that prior to using the clause.  Basically the clause looks something like this:

We will beat any verifiable offer by __________ dollars up to _____________ dollars. 

So for example, lets say there's a property listed at $200,000.  There's currently 5 offers on the property.  You're willing to pay up to $210,000 but don't want to spend that much if you could spend less and still be the highest offer.  You could use an escalation clause in this situation saying "We will beat any verifiable offer by $500.00 up to $210,000.00.  So that way if the highest other offer is $205,000, then you could get the property for $205,500 instead of paying the $210,000.

Keep in mind that other people can use escalation clauses as well.  The seller may choose to counter one of the offers or take the escalation offer with the biggest margin.  A smart agent would have their seller just counter the offer at your top end price, but a lot of agents don't do that;)  Also, just because they counter at that price...doesn't mean you have to accept at that price.  To some degree you are "showing your hand" by doing an escalation clause so you need to consider how badly you want the home first in case they do counter at your top end.

The escalation clause strategy doesn't always work and isn't always appropriate but it's a good extra tool to keep in your back pocket in multiple offer situations.

Sarah Rowan Headshot
Phone: 970-397-5774
Dated: December 10th 2014
Views: 314
About Sarah: Sarah was a licensed real estate agent for 10 years before transitioning into the mortgage industry ...

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