What Is an Escalator Clause?
If you’re not familiar with an escalator clause and you’re in the market for a home, then it’s time to get educated.
An escalator clause — also called an escalation clause, by some — is added to a buyer’s offer, essentially telling the seller that “XX is my offer, but I am willing to go as high as XX if another bid comes in higher.” The clause also states how much your offer escalates over other offers (often by $1,000 or $2,000 over the next-highest bid).
Here’s an example: Say you’ve found a home listed at $250,000. You’re in love with it, but you don’t want to pay more than you need to. You offer $230,000, with an escalation clause up to $250,000, in $2,000 increments. In the event another offer comes in over that $230K — say at $235K — your escalation clause would allow you to win the bidding war. You’d pay $237K for the home, and the deal would be done.
There are two situations when you might want to include an escalator clause:
- When you’re submitting a lower-than-listing-price bid. If you know you’re going under what the seller’s asking for, including an escalator clause (at least up to listing price or maybe a little over) can give you a bit of a safety net.
- When you’re in a bidding war or super competitive market. Were there tons of other buyers at the open house? Is there a severe shortage of inventory in your area? Is the home just that great? Then an escalator clause can help give you an edge over the competition. In the event someone bids the same as you — or even a little higher — it ensures you’re still in the running to get the home.
Regardless of which group you fall into, if you’re using an escalator clause in your bid, you might also want to include an offer letter. These letters give you a chance to explain your bid — why you offered what you did, your unique financial circumstances, etc. — as well as share your love for the home. What drew you to it? What do you love about it? What plans do you have for its future?
Offer letters are a great way to stand out with sellers — and in a bidding war, they may be what helps your bid edge out another. Coming to the table with a pre-approval letter can also help set you apart. To get pre-approved before you start home shopping, contact an Embrace loan officer today.