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Q: How Does an Escalation Clause Work?

Homes For Sale Norfolk NE

An escalation clause is one way to stand out as a homebuyer.

In a hot real estate market like ours, it’s not uncommon to go up against multiple offers when buying a home. The National Association of Realtors has indicated that listings in May received an average of three offers! The majority of listings coming on the market right now are receiving multiple offers and selling at or above asking price. To win against this kind of heavy competition, you’ll need a sound strategy.

There are many things you can do, but one thing that has been particularly useful to us and our clients is an escalation clause. Here’s how it works:

Let’s say you make an offer on a home that you and your agent believe is worth around $300,000. When you make that initial offer, an escalation clause says that you will increase your offer up to a certain amount based on what other buyers offer. If you make an offer for $300,000 and another buyer makes an offer of $305,000, but you have an escalation clause that says you will offer $1,000 more than the next highest offer until the price exceeds $310,000, you’re in a much stronger position than the buyer who made the initial $305,000 offer.

If there aren’t going to be multiple offers, you probably shouldn’t use an escalation clause.

An escalation clause shouldn’t be used in every single scenario, however. For example, if you make an offer on a home that doesn’t have any other offers, an escalation clause isn’t really necessary. An escalation clause should only be used when a buyer or their agent is confident that there will be multiple offers and offers over the asking price. 

Escalation clauses are fairly complicated legal addendums to a standard real estate contract, and they should only be used by experienced Realtors. When it is used properly, an escalation clause can mean the difference between winning the home of your dreams and losing out on it by a few thousand dollars.

If you have any questions for me about escalation clauses or anything else related to real estate, don’t hesitate to reach out via phone or email today. I look forward to hearing from you.

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