An Overview of Escalation Clauses When Buying Property
Are you in the market for a new house, condo, townhouse, or commercial property? Are you currently trying to sell your property? Depending on your location and the type of property, a seller may be presented with multiple offers or a buyer may be outbid by other prevailing offers. Currently it is a red-hot seller’s market and there is a high demand for properties. This is causing multiple bidding wars when trying to buy a property and properties are selling very quickly. As a buyer in a seller’s market, it can be challenging to make your offer stand out amongst the rest. One way a buyer may be able to get their offer to stand out is to include an escalation clause in the offer.
Escalation clauses have many different variations and contain different sections, but the concept they all share is that a buyer is willing to increase their initial offer. Generally, an escalation clause contains the amount of money to add to the buyer’s initial offer in order to become the highest offer, and the maximum purchase price that the buyer is willing to pay for the property. An escalation clause can range from being very simple to being more complex. For a simpler escalation clause, it may include only the basic core element. For example, a simple escalation clause may state something along the lines of, “Buyer agrees to pay $500 more than the highest offer, not to exceed a final purchase price of $300,000.” That example contains the general concepts and it tells the seller how much the buyer is willing to increase their offer to and also sets the maximum amount the buyer is willing to go to purchase the property. When it comes to creating a more complex escalation clause, it may have sections including, but not limited to:
Telling the parties how to handle one or more escalation clauses from competing offers.
Stating what exactly will be escalated, whether it may be the purchase price, net proceeds, or a combination.
Whether either party will be required to sign more documents if the escalation clause is triggered.
Identifying how the buyer will cover the escalated amount.
Additionally, in an escalation clause it will usually spell out the escalation procedure. This procedure specifies where exactly the increase of funds will come from. When an escalation clause is triggered, the increase can raise the down payment the buyer is willing to put down to purchase the property. Another place funds can be paid from as a result of an escalation clause is from the financing. For example, Beth the Buyer stated to Sam the Seller in her offer’s escalation clause that in the event of a competing offer, her offer will raise an additional $1,000 above the next highest offer to cap at $300,000 and that in the event of an escalation, Buyer will cover the increase in price by upping her down payment to maintain a 20% down payment and she will finance the rest. After competing offers come in and the escalation clause kicked in, Beth the Buyer’s offer was accepted after the final sales price increased from $250,000 to $265,000 due to the escalation clause. As a result of this acceptance, Beth the Buyer’s down payment increased from $50,000 to $53,000, meaning she will have to pay an extra $3,000 towards her down payment and her amount financed has increased to $212,000 pursuant to the escalation clause in her offer to buy the property.
In this crazy seller’s market, escalation clauses are becoming more popular, not only in other states, but especially in Florida. The positive side of having an escalation clause in a buyer’s offer is that it could potentially make the buyer’s offer stand out amongst the crowd of competing offers while helping the seller of a property finalize negotiations. Although price is not the only condition sellers look at when reviewing multiple offers on a property, there can be other conditions that makes an offer appeal to a seller even if it has a lower purchase price. The negative side is at the end of the day a seller is not required to follow the escalation clause unless the seller accepts the offer. A seller is not obligated to accept any offer on their property. A seller can either hold out for a higher priced offer, wait for an offer that has better conditions, or even accept an offer that has a lower price than the other competing offers. In the end, escalation clauses can be beneficial to both buyers and sellers when the market conditions favor the sellers.