Monday, February 19, 2018 / by Lindsey Gudger
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Today, we’re talking about a unique addendum for a Purchase and Sale agreement: the escalation clause.
If you are currently in the process of a real estate transaction and you haven’t heard of escalation clauses, then you are working with the wrong person. This clause is included in the vast majority of offers we write, because it’s a requirement in a competitive market.
Now, let’s talk about what it is. An escalation clause essentially has two key elements: the “max” and the “step.” The “max” is the maximum figure you are willing to spend on a home and the “step” is how much more money you are willing to give for the home than the next competing offer.
An escalation clause only kicks in when there’s another offer on the table. So one of the requirements of the clause is that the seller shows you proof of the other offer. This ensures you don’t overpay, since activating the escalation clause pushes your offer up from the initial figure you put forward.
To give you an example of an escalation clause at work, we’d like to share an interesting story.
We recently helped a client who was looking at a condo in West Seattle. We were competing against a cash offer, so we proceeded with an escalation clause. At first, the buyer wanted to go just $1,000 or $2,000 over the competing offer, but this wasn’t going to be sufficient. Why would the seller of a $500,000 listing take a risk on a financed offer for just $2,000 more than the all-cash offer on the table?
So, after talking with our buyer and explaining this to them, we upped the step. We made our offer much more compelling and beat out the cash offer while still paying less than the buyer’s maximum threshold.
As a buyer in today’s market, it’s important to put yourself in the seller’s shoes as you make your offer. This will benefit everyone and, in the end, help you get a better deal. Of course, any offer you make will still have to appraise, so keep that in mind as you move forward.
If you have any other questions or would like more information, feel free to give us a call or send us an email. We look forward to hearing from you soon.