In today’s heated real estate market, some sellers are receiving multiple bids soon after listing. When faced with competing bids, buyers need to up their game. Some are adding an escalation clause to their offer in an effort to gain an edge. What are these clauses?

How Escalation Clauses Work

Escalation clauses are additions to an offer specifying that the buyers will raise their offer by X amount higher than the highest offer the seller receives, up to a maximum amount. For example, let’s say there are three competing bids for a house priced at $400,000. One buyer offers $400,000 and includes an escalation clause that will raise her bid $2,000 higher than the highest offer received, up to a maximum of $410,000. If the highest bid received was $407,000, the offer from the buyer with the escalation clause rises to $409,000, making it the new highest bid.

This is a simple version of what can happen. When there are many offers, the likelihood increases that several of them will include an escalation clause, complicating the selection process for sellers.

Escalation clauses seem like a boon for sellers, but some sellers who are expecting multiple bids think they may get a better price without them and ask their agent to communicate in advance that escalation clauses won’t be considered. This forces buyers to make their best offer up front, which sellers hope will result in a higher price. Sellers may also think that buyers who make their best offer first will be more committed to the purchase and less likely to second-guess the price later on.

Price Isn’t Always Everything

Keep in mind that although price is the most important consideration to most sellers, other aspects of your offer also matter. When there are multiple bids, some buyers try to improve their offer in the seller’s eyes by waiving some or all inspections, despite the risks. They may also waive the appraisal contingency, committing to buying the house even if it appraises for less than they agreed to pay.

Where to Go from Here

In a hot market, you may need to make quick decisions about whether to make an offer, and if there are multiple bids, whether to include an escalation clause or submit your best offer up front.

If your offer isn’t accepted, will another home come along that you like as much? You’ll need to weigh the fear of missing out on a home against the risk of overpaying and regretting your decision later on. Step back, take a deep breath, and ask yourself, “how much do I love this house, and how disappointed will I be if I don’t get it?” Then make the offer you think makes the most sense for you.

Read more of Annette’s real estate articles for the latest real estate advice. What real estate topics would you like to see covered? Send your ideas to annette@preferredhomes.com

If you’re planning to buy or sell a home, contact Annette Nelson at (610) 247-7892 or annette@preferredhomes.com

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