What is an Escalation Clause?

Contrary to popular belief, things are still flying off the [real estate] shelf here in Sioux Falls. We continue to see an increase in pending sales in the area.

In hot real estate markets where properties are receiving multiple offers and properties are being sold over list price a popular technique used by savvy realtors is the escalation clause.

Curious what the escalation clause is? Here is a great example.

Property 6408 S Fairmont Circle is listed on the MLS for $200,000. This is a smoking hot deal in an IDEAL neighborhood. This is EXACTLY what you as a buyer have been looking for – it’s your dream home! You tour it, fall in love, and want to submit an offer ASAP! Since we know the property is priced to sell and there’s going to be multiple offers on the property - here's what we do.

We decide to submit a full price offer of $200,000 with an escalation clause up to $210,000 in increments of $1,000. What does this mean? This means if another offer comes in above our initial offer of $200,000 – say $205,000 – our offer instantly increases to $206,000 ($1,000 above the next best offer).

Although, if no other offers are submitted we only have to pay our initial offer price of $200,000.

Should another offer come in at $215,000 unfortunately, we’d be out of the running because our escalation clause only went up to $210,000.

When is it appropriate to use this escalation clause? 

There’re two instances – and they often coincide – when it’s very appropriate to use the escalation clause.

1) When there’s a multiple offer situation and

2) when the seller/selling agent is calling for highest and best offers at a very specific time (as in “all offers due by Thursday at 5:00 pm”).

In both of the above situations we KNOW we’re competing against other offers and if you absolutely love, love, love, the property we want to make sure we’re being as competitive as possible with our offer. There are many strings that we can pull to make our offer more competitive but at the end of the day sellers are looking for the highest purchase price possible – the escalation clause is an excellent tool to get there.

This is just one of the many tricks of the trade in real estate and something we bring to the table for ALL the buyers we work with – if you’re looking for your dream home and want to be absolutely sure you’re not going to lose out on it, let’s talk! 

Original blog post can be read here.

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