The Escalation Clause: One Option to use in a Bidding War.
If you’re considering buying a house in an area where homes are flying off the market and bidding wars are common, (such as we have had a few time in Atlanta over the last few years) a well crafted escalation clause in your offer can be an important strategy to use in multiple-offer situations.
An escalation clause allows your offer to automatically increase by a certain amount in response to a competing buyer’s higher bid, with a maximum offer price stated in the contract.
Here’s an example of how this strategy works: Say you offer $250,000 for a house. In your escalation clause, you specify your bid can automatically go up by $2,000, with a maximum offer of $268,000 for example. When another buyer bids $252,000, your lower offer doesn’t lose out right away as it normally would, because the clause automatically escalates it to $254,000.
Of course there are several important considerations to make before using an escalation clause. Will the house still be a good deal at the maximum price, and will it appraise in case your offer escalates to the maximum price in your clause? Will the seller/bank accept your offer with an escalation clause?
Above all, you’ll need to ensure your mortgage approval/pre-approval amount covers the maximum price increase listed in the clause. It’s imperative to talk this strategy over with a knowledgeable agent to make sure it is a viable option for the home in question, your situation, and the market, and then run this plan by your lender before deciding to use an escalation clause.
The Bottom Line: a lot of buyers miss out in competitive low inventory markets and trying to submit an ordinary offer in a bidding war situation is one of the ways that happens. But with the right strategy and one that makes financial sense, you may be able to win an offer on a home you really like – even in this kind of environment. The right options and strategies can give you an edge in any market – the key is having an agent who understands strategies like the escalation clause.
Contact Robert Whitfield 678-585-9691 with questions or to discuss his elite level Buyer Representation services and Wise Buyer Program™.