What is an Escalation Clause and how can it help you negotiate a winning offer when multiple offers will be in contention.
An Escalation Clause is an addendum that is added to an offer to purchase a house. It says that you will beat any other offer by $1,000, $2,000 or $5,000 (any amount you choose), up to and not to exceed your top bid for the house.
For example, a house is listed for $775,000, and you offer $780,000 with an Escalation Clause that you will beat any other offer by $1,000, up to and not to exceed $805,000.
Two other offers are on the table, and we don't know what they are offering for the house. You find out later that the first buyer offered $795,000, and the second bidder offered $800,000.
This is where your Escalation Clause would come into play, increasing your offer to $801,000, making you the highest bidder. One of the other bidders can raise their offer, but your bid cannot be revealed to the other bidders. Assuming the two other bidders will not come up higher than $805,000, you win the house.
You may offer an Escalation Clause with "TBD" (to be determined) in the highest bid section of the document. That will allow you to maintain the upper hand in negotiations.
Now the seller can't just pull a higher offer out of thin air and tell you a fib to push your value higher. The seller can't just pretend to have a higher offer. The seller has to send you a signed copy of the competing offer, with a copy of the deposit check, and all related addenda.
If $805,000 is outbid by another buyer who offers $810,000, your $805,000 top limit would protect you from going higher than you want to go.
How you determine your highest and best offer: Pretend you are told that another buyer is ahead with a price of $810,000 and you say, "I would have paid that," raise your maximum offer to $810,000, and set the top of the escalation clause at outbid the buyer by $1,000.
If you find out that you lost a house to another bidder for $820,000, and you say, "There's no way I would pay that much for that house." You have found a price that exceeds your top limit, such as $815,000, or $817,000 as the highest and best you would pay for that house. Let the other bidder pay $820,000, and you go find another house.
Ask your agent for a copy of a blank Escalation Clause and study it to find out whether or not you wish to add one to your offer to buy a house. It's an important tool to apply when you want to limit your highest and best offer.
Call Markita Woods, Queen of Mortgages at 703-929-2274 for more details on how her scalation Clauses have helped her buyers win bidding wars.
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