Understanding Escalation Clauses in Home Offers

Buyers who have been on the home market anytime in the past six months are well aware: It’s a seller’s market out there. Many homes will have multiple offers placed on them within just days of hitting the market, and buyers – plus their realtors and loan officers – are looking for ways to improve offers and make them more attractive to sellers.

At Altius Mortgage and our partners at Mortgage Ogden, we’re happy to serve the vital loan officer role in this process, offering mortgage loans for a variety of buyers. We’ve assisted numerous clients with everything from pre-approval and confirmation of purchasing power through finalizing their loan, and we’re happy to offer several areas of expertise when it comes to improving offer quality. One tool that some buyers are using is the inclusion of what’s called an escalation clause in their offer to the seller – what is an escalation clause, how does this work, and should you consider using one in your next offer? Here are some basics to consider.

Escalation Clause Basics and Example

Also simply referred to as an escalator in some circles, an escalator clause involves a buyer stating in their offer that while they are offering a certain monetary amount, they are actually prepared to pay some extra if needed – to a certain point, which will also be defined in the offer.

As a simple example, let’s say you’re considering a home that was listed at $300,000, and offering at this listing price. However, you’re also including an escalation clause that says you are prepared to go over the asking price by $10,000. In this case, if another prospective buyer offers a maximum of $305,000, you would be the winning bid as part of your escalation clause.

In other cases, an escalation clause can be done differently. You can state that you will beat the next-highest offer by some amount, usually $1,000 or sometimes more – in the above example, if you used this method, your offer would automatically trigger to $306,000 if the next-highest offer was $305,000.

Do I Need an Escalation Clause?

There’s no such thing as “needing” an escalation clause, but these have absolutely become more common over the last six months or so as the market has become so tough. If you’re offering on a great home you know will have several offers, an escalation clause is often a great way to put all your cards on the table and perhaps gain an advantage over other buyers. Your realtor will often be able to speak to the seller’s agent and determine if lots of offers will be coming in – if this is the case, you may consider an escalator.

Possible Reasons to Avoid an Escalation Clause

On the flip side, some realtors won’t work with escalation clauses – whether the seller’s agent or even your own agent. This is for a few reasons, including the possibility that there aren’t multiple offers; in these cases, adding an escalator really just signals to the seller that you’re willing to pay more than what you offered, and often limits your leverage in negotiations. In addition, for the second form of escalator we went over above, where you offer a set amount above the next-highest offer, there’s some serious potential risk here if another offer comes in very high.

For more on escalator clauses, or to learn about any of our mortgage loan services, speak to the staff at Altius Mortgage today.