What is Escalation Clause?

#escalationclause #offer #addendum #purchaseandsaleagreement

Have you ever heard of escalation clause? If you're first-time home buyer, you might be puzzled. Why would you need to know about it?

For experienced home buyers and home sellers, that term settled in. Probably. I mean, only in you have been in the market for buying or selling during past few years.

And what exactly escalation addendum is? As its name says, it is Addendum (or addition) to your Purchase and Sale Agreement, popularly known as The Offer. Why would you need one, you ask? Or when? Those are all good questions!

In the recent years we've been witnesses of frenzy hot real estate market. Buyers needed to compete with dozens of other buyers-to-be for each new house on the market. Sellers are getting their homes sold in days without any strings attached. That was the exact example of extremely hot sellers' market.

The escalation addendum is a great way to compete in the market so hot. It's almost difficult to make any offer without including this form in certain markets throughout our state.

addenda

When is the escalation addendum going to be used?

When a buyer wants to submit an offer and there may be another competing offer expected, then buyer's broker and buyer may decide to use this addendum. Buyer may want to provide for an escalation of the price in order to compete against other offers. This addendum establishes the terms by which buyer's offer will escalate, including the maximum price buyer is willing to pay for the property.

Use it with care and diligence!

The use of this form is risky and requires the utmost care and diligence in order to protect the buyer. This form is not generally recommended, rather it's provided as courtesy to brokers and their clients. Because of the risks inherent in the use of this form, brokers and buyers are strongly encouraged to seek the advice of designated broker or legal counsel.

Legal advice

When an escalation addendum is included in the offer, remember that it is binding to no one, because the mutual acceptance is not reached yet. It does not become binding until the offer is fully executed, the competing offer is provided, and mutual acceptance is occurred. Until that time, seller is free to negotiate with other buyers, may disclose the terms of YOUR offer to other buyers, or may reject all of the offers and demand that all interested parties make their highest and best offers without escalation provision.

The presence of an escalation provision is also challenge to sellers. Seller may consider making counteroffer that excludes escalation addendum to simplify transaction. In doing so, seller could still provide any competing offers to buyer to show that he/she received other comparable offers.

What Is Considered Competing Offer?

The competing offer is another buyer's offer. It can contain almost any term, except that closing time must be the same and buyer's sale of his own property must not be contingent). If seller is using competing offer to escalate the purchase price, seller must provide a complete copy of the competing offer in its entirety at mutual acceptance (confidential information issue!).

There have been instances where competing offer did not qualify as a competing offer because the closing date fell outside of the time period in the offer.

Conclusion

As is always the case with any addendum, brokers and buyers or sellers should have good communication of pros and cons of using it. For buyers, in recent years, the escalation addendum has essentially been a necessity.

The benefits are that in the event that the property is less competitive, an escalation addendum can ensure that, while a buyer is willing to pay a higher price, they will only pay a specified amount greater than the next highest offer. This has the effect of limiting the price the buyer will ultimately pay compared to what they may have been willing to. Of course, there's always the flip side to that. When there is a highly competitive situation, the buyer's purchase price can and will often be driven to the highest amount they are willing to pay. You might see that as a negative, but it's important to point out that the buyer does have full control over what the maximum amount is.

The biggest argument to the negative regarding this form is a situation where there are perhaps 6 to 10 offers on a property and buyer, as well as one other buyer, deem this property to be very valuable to them. In this case, two competing parties are driving themselves into a higher purchase price, when the general market doesn't necessarily value this property in the same way that they do. Unnecessary overpricing!

Be wise in crafting an offer. Take privacy into consideration in you're thinking of using this addendum to offer and pay attention to not go above your limits - those would be my advice!

If you need assistance in home buying, I am here to help. And big plus - consultations are always FREE!