We are still experiencing a seller's market here in Ventura. Low inventory means that buyers sometimes find themselves fighting with other buyers over a Ventura home they love. That is where an escalation clause could come in handy. What is it and how will it help you? Read on to find out.
The Escalation Clause and the Ventura Home Buyer
What is an Escalation Clause?
Basically, an escalation clause states that you promise to increase your offer by a certain amount if another buyer puts in an offer higher than yours. This keeps your bid the highest. Sellers like that. Your offer states an exact amount you want to pay for the property. But it includes a clause stating that you promise to go a specific amount over the highest offer ($5000 for example) up to a certain limit. That may not guarantee victory. However, it offers a better chance for acceptance of your offer than you may otherwise possess.
How Does It Work?
Just like any other offer, you submit the amount you wish to pay for the property. For example, the listing says $700,000. You know other buyers will jump on this. So, you offer $710,000. To set your offer above the rest, you include an escalation clause that says you promise to pay $5,000 over the highest bid if it comes in above yours. That means that, if a buyer comes in at $720,000, you agree to pay $725,000. In addition, you set the limit of this escalation at $730,000. Then, if the highest bid comes in a $725,000, you still end up the highest bidder by promising to pay $730,000. It never goes above the pre-set limit you put in place. On the other hand, if no other buyer goes above your initial $710,000 offer, you pay no more than that.
A Gamble
By utilizing this clause, you lay all of your cards on the table for the buyer to see. They know exactly how high you are willing to go. In turn, they may come back with a higher counter offer that happens to coincide with your limit. Plus, the seller is not legally compelled to tell you whether any other offers were actually legitimate ones or not. Also, the highest bid does not necessarily mean the winning bid. Some sellers look at other things besides price when deciding on whether to accept a bid or not.
When to Use The Escalation Clause
Only consider utilizing this clause if you know a bidding war is likely or if other buyers submitted offers on the property already. Your Ventura REALTOR® can check on that for you. Never set your limit higher than you can reasonably manage. Also, keep market value in mind. If you need to borrow money to pay for your purchase, the lender will not approve a loan for any more than its assessed value. If you still want the home, you may have to come up with the difference out of pocket. This may also be where an appraisal contingency comes in handy. So, keep that in your offer as well.
An experienced Ventura County REALTOR® should be able to help you determine whether an escalation clause is appropriate or not. Talk to them before adding it to your offer. Also, listen to their advice about other things you may want to include in your offer to make it as strong as possible. Contact us when you are ready to start looking for your next Ventura area home.
Dave & Pat Zumbrun, your Ventura County real estate specialists
Originally posted on our Ventura County real estate blog here: https://thezteam4re.com/escalation-clause-home-buying/.
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