In our low-inventory situation, we are all looking for ways to help buyers compete for great properties. One of the strategies that has become popular again is the use of the escalation clause.
An escalation clause allows you to start out with a reasonable offer on a property, and top the highest offer by an incremental amount up to a certain cap. For instance, if a property is listed at $250,000, one might offer $250,000, but allow the offer to escalate $1000 over the highest offer up to a cap of $260,000. This is a great way to compete with other offers in a multiple offer situation with less risk of overpaying for the property.
Having said that, there are some things to keep in mind when deciding between using an escalation clause, or just going in with your highest and best offer:
- You should have the cash on hand to make up the difference between the list price and the escalation cap. If you do not, the seller may feel like you pulled a bait-and-switch tactic and will be hesitant to come down should the property not appraise.
- You should not make the escalation cap some arbitrary number that is out of the realm of possibility to appraise. This often backfires and scares the seller. If you do, the seller may turn your offer away even though it is the highest because it just does make sense. The property does still have to appraise if you are financing, so the cap must be realistic.
The escalation clause is a great strategy for winning the property when used properly and under the right circumstances. If you would like to know more about escalation clauses or any other topic, give me a call today at 513-236-1254!