What is a price escalation clause?
This clause let’s a home buyer say, “I will pay X price for this home but if the seller receives another offer that is better than mine, I’m willing to increase my offer by X price. However, it should not exceed X price.” NOTE: This is done in stepped dollar increments frequently by $250, $500, or $1,000 up to the buyer’s ceiling price.
Here’s an example:
Buyer A offers $100,000 on a home with a rider that states, in the case of multiple offers; increase Buyer A’s offer by $1,000 and the maximum escalation is $110,000.
If no other buyers put in an offer, Buyer A’s offer stands at $100,000. However, let’s say another buyer comes along…Buyer B. Buyer B puts in an offer at $105,000. Buyer A’s offer automatically goes up to $106,000. If another buyer, Buyer C, puts in an offer at $110,000, Buyer A would not have the best offer as their escalation rider topped at $110,000.
Why use a price escalation clause?
This clause protects a client from overpaying AND also makes you a bit more appealing in a competitive offer situation. It states that you are only paying X amount more than the next highest offer and ONLY kicks in when other offers are not contingent on anything. It also protects the client as it gives the buyer a better chance of saving money and prevents them from having to go up to the highest bid.
Not every agent (or seller) will allow a price escalation clause. In fact, most bank owned properties will not. In the state of PA, if a seller takes advantage of the price escalation clause they must then provide a copy of the competing offer so that you can rest assured that the price escalation is fair.
When to use a price escalation clause?
Price escalation addendums are used during multiple offer situations and lets the seller know the buyers are really serious about pursing the home. Remember, you should never pay more than what you are comfortable with. Also, keep in mind that in order for a price escalation rider to kick in the sellers have to show us the other offers. That way we know for sure the other offers exist. IMPORTANT: Even if the price escalation is taken advantage of, the home still has to appraise at value. IF the home does not appraise at the increased sales price then the appraisal cut has to be negotiated between seller and buyer. Either the seller takes the hit, the buyer brings extra cash to table, or they split it down the middle.
Need more clarification? Contact us me at 717.963.0016 or firstname.lastname@example.org.