What is an Escalation Clause? | Escalation Clause Real Estate Example | Arlington VA Real Estate

What is an Escalation Clause? | Escalation
Clause Real Estate Example | Arlington VA Real Estate Today we are looking at the escalation clause
used when purchasing a home. Buyers can add an escalation clause to their contract to
make it stronger. But there are some things about the escalation
clause that I don’t think all purchasers understand so in today’s video we’re going
to take a look at what an escalation clause is, go through a sample escalation clause
and take a look at mistakes people make when using an escalation clause. So stay tuned,
we’ve got a great video coming up. Ok so an escalation clause is an addendum
to a sales contract that states the purchaser will increase their offer by a certain dollar
amount over the next highest bidder, but not higher than what’s known as the escalation
cap. So let’s go through a hypothetical escalation
clause. Say I make an offer on a property and submit my contract at $500,000. You also
submit your contract and your offer is $495,000. My offer wins right? Well since you’re a
smart buyer and used a real estate agent, that agent recommended that you include an
escalation clause of $10,000 with increments of $1,000. So because my offer is present,
my offer triggers your escalation clauses and now your $495,000 offer escalates to $501,000.
Everybody understand how that works? Your offer could escalate up to $505,000 but there
needs to be another offer at $504,000 for your offer to be at $505,000. Think of it like eBay. You are making a bid
and you want to pay the lowest, but you are willing to pay the highest. So now you understand what an escalation clause
is and how it is used, let’s take a look at some common mistakes buyers often times
make when using the escalation clause. And the first one is not having your escalation
interval at a big enough amount. I work with a lot of buyers and sellers in the $700,000+
price range and if you are only escalating $1,000 each time, it may not be enough to
move the meter for the seller if another offer has a better close date or not as many contingencies.
So take into consideration the price point you are at and adjust your interval accordingly. The next mistake I see is submitting the escalation
clause without knowledge that another contract is present. Don’t do this! The listing agent will just counter your offer
at your max escalation or somewhere in the middle of your escalation. So officially,
you need proof that there is another offer to utilize the escalation, and I personally
have not take this route. But what you are conveying to the sellers is that you will
only pay X amount, but you could really pay x + $10,000. Even if there isn’t another
offer. The sellers could reject your offer, counter back at $5,000 more and you might
get the home and feel great because you didn’t have to pay an extra $10,000, but at the end
of the day, you just lost $5,000. What I would recommend if you have been told
that “another offer is on the way” is to submit your contract and tell the listing
agent to update you if they get the other offer. Then at that point, you submit the
escalation clause, so the sellers actually have another offer that would trigger the
escalation. Otherwise, you are showing all your cards at once and could lose your entire
bargaining strategy. Just please only include an escalation clause
when you are 100% sure that there is another contract in play. Okay so we’ve gone over a few mistakes purchasers
make now let’s close it out with one last tip. And that is to use unique intervals.
Don’t escalate by $1,000. Escalate by $1,250 or $1,600. Make your cap escalation $12,750.
Everybody likes nice round numbers. Well I can tell you this much that sellers like numbers
that are larger. Most offers will escalate using nice round numbers To stand out, use
uneven numbers that are a few hundred or a a few thousand more than what you would commonly
think to escalate by. Great so in this video you learned what an
escalation clause is, the top two mistakes that buyers make, and I just told you my number
one tip for purchasers. Hey if you learned anything in this video
or took value from watching, please go ahead and click the subscribe button. That would
be awesome. Check out my channel for more helpful tips
and videos on real estate. Thanks for watching until next time, create a productive day.
Take care.

Paul Whisler


  1. Thanks for this useful information. Great video! Always looking forward to learning more from your channel.

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  3. How do i know for sure there are other offers on the table!? I ask the seller agent!?

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