When you are in the market for a home, you can feel like you are in a pool of sharks. If there are a great number of buyers all vying for the same home, you might feel as if you just want to make the largest bid possible. While we don’t recommend doing that right off the bat, you could add in what is called an escalation clause in your contract.
The escalation clause lets the seller know that you are willing to raise your bid to a certain amount above the maximum bid they’ve received. The clause does include a ceiling or maximum amount you will bid so that things don’t get out of hand. But is it ever a good idea to include such a bid?
Keep reading to find out.
The Benefits of the Escalation Clause for the Buyer
As a buyer, buying a home is stressful! You have a lot of other people that you don’t even know bidding against you. What if the seller doesn’t accept your bid? Are you just out of the running then? If these worries keep you up at night, an escalation clause can help settle you down a bit. It takes the worry about what if someone else bids higher than you. Because you get to put a ceiling on your escalation clause, you know you won’t get in over your head, so it’s like a win-win situation for you.
Another benefit of the escalation clause is it takes the stress of counter offers away from you. If you can’t stand the thought of going back and forth with the seller, the escalation clause can put it all on the table. It tells the seller – here’s what I’m willing to offer you, are you going to take it?
The Downside of the Escalation Clause for the Buyer
The downside of the escalation clause is that some sellers just don’t like them. In fact, many sellers tell their realtors up front that they won’t accept an escalation clause. Many times sellers feel like they leave money on the table when they accept an escalation clause. They would much prefer to counteroffer the bids that have come in and see where it takes them. At least this way, the seller has an active role in how much the home sells for and there won’t be the ‘what if’ questions regarding the final price.
Another downside is that you pretty much put it all out there for the seller to see. If you were hoping to keep how much you would actually pay for the home under wraps, it’s no longer a secret. The seller now knows how much you would pay for the home. What happens if there aren’t any other bidders on the home? The seller knows how much you are willing and/or capable of spending on the home and will likely come back and counteroffer your offer. If you hadn’t submitted that clause, the seller would never know you could pay more and may have accepted your original offer.
Unless you know for a fact that there are many bidders on a home, it’s probably best to leave it as is. Don’t put the escalation clause in unless your realtor says it’s necessary. This way you have a little bargaining room and can see how the whole plan plays out. If you reveal your cards too soon, you could either end up with a counteroffer for the maximum amount you would spend or you might not get the home at all.